Penn Entertainment Inc (NASDAQ: PENN) shares rose in early trading on Monday, even after shedding around 3% in premarket trading.
The company reported disappointing first-quarter results earlier this month and the ESPN Bet market share is now "too low," according to BofA Securities.
The Penn Entertainment Analyst: Shaun Kelley downgraded the rating for Penn Entertainment from Buy to Neutral, while reducing the price target from $28 to $17.50.
The Penn Entertainment Thesis: The twin challenge with ESPN Bet is that the revenue is too low, while the fixed costs are too high, Kelley said in the downgrade note.
ESPN Bet's cost base of $1 billion "appears meaningfully too large for its current revenue," while it seems difficult to scale it to profitability, which leads to "higher for longer" losses, posing significant risk to the fourth quarter and 2025 estimates, the analyst wrote.
While Penn Entertainment's core business trends are "lackluster," its rising balance sheet leverage increases execution risk, he added.
"While sentiment for the stock is at its lows, we see PENN as now more of a deep value turnaround than a growth opportunity," Kelley further stated.
PENN Price Action: Shares of Penn Entertainment were up 0.65% to $16.18 at the time of publication on Monday.