Stock Repurchase, Retail Projects And Digital Rollout Will Shape Outlook

Key Takeaways

• PENN Entertainment's stock repurchase and retail growth investments signal confidence and are expected to boost earnings and future revenue growth.
  
• Expansion in digital and sports betting with strategic partnerships is aimed at improving margins, targeting digital profitability by 2026.
  
• Increasing local competition and unprofitable digital segments could pressure earnings, while execution risks in new markets pose challenges to future revenue growth.

Catalysts

Provides integrated entertainment, sports content, and casino gaming experiences.

• PENN Entertainment plans to repurchase at least $350 million of its own stock in 2025, highlighting management's confidence in the company's prospects. This could help enhance earnings per share by reducing the number of outstanding shares.
  
• The company is investing in four retail growth projects, including a new property in Joliet, Illinois, which are anticipated to generate attractive returns over the coming years. These projects are expected to positively impact future revenue growth.
  
• PENN is expanding its digital offerings by launching stand-alone Hollywood iCasino products in states like Pennsylvania and Michigan, with plans for further expansion. The growth in the iCasino business is expected to improve margins and EBITDA due to its strong margin profile.
  
• The ESPN BET online sports betting business is being optimized in collaboration with ESPN, focusing on increasing handle market share through enhanced integrations and marketing strategies. Success in this area is anticipated to drive revenue and improve EBITDA margins in the digital segment.
  
• PENN is targeting breakeven financial performance for its digital segment by the end of 2025 and profitability in 2026, marking a significant improvement of $350 million in digital EBITDA year-over-year due to optimized operations and strategic cost management.

PENN Entertainment Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PENN Entertainment's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from -4.7% today to 6.1% in 3 years time.
• Analysts expect earnings to reach $466.4 million (and earnings per share of $3.32) by about May 2028, up from $-311.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $528 million in earnings, and the most bearish expecting $404.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.7x on those 2028 earnings, up from -7.7x today. This future PE is lower than the current PE for the US Hospitality industry at 22.3x.
• Analysts expect the number of shares outstanding to decline by 1.34% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.41%, as per the Simply Wall St company report.

PENN Entertainment Future Earnings Per Share Growth

Risks

• New competitive supply, such as the Cordish Live! property in Bossier City, Louisiana, and the introduction of gaming in Omaha, Nebraska, could impact future revenues by increasing local competition in PENN's existing markets.
  
• The digital segment is expected to remain unprofitable throughout most of 2025, forecasting losses of $100 million to $200 million, which could pressure net margins and earnings for the year.
  
• During periods of adverse weather, there has been notable volatility in property visitation, which could impact quarterly revenues negatively.
  
• Investment in growth projects and delays, such as the potential closure related to the Joliet transition, could result in short-term revenue and earnings disruptions.
  
• There is execution risk associated with both the launch of new retail projects and the rollout of new digital products in untapped markets like Missouri and Alberta, which could impact expected future earnings.

Valuation

• The analysts have a consensus price target of $22.531 for PENN Entertainment based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $30.0, and the most bearish reporting a price target of just $16.5.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $7.7 billion, earnings will come to $466.4 million, and it would be trading on a PE ratio of 9.7x, assuming you use a discount rate of 11.4%.
  
• Given the current share price of $15.83, the analyst price target of $22.53 is 29.7% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.