Summary
- Management has provided guidance for 2023 with expectations of $6.15 to $6.58 billion in revenue and $1.875 to $2 billion in EBITDAR.
- PENN's 4Q22 results were consistent with expectations and showed solid performance in the Interactive segment, with a 17% increase in revenue.
- The stock is more or less fairly valued now, in my opinion.
Investment thesis
I see a 3% upside to PENN Entertainment Inc (PENN) stock. In my opinion, the current price is a reasonable reflection of the value. If the stock were cheaper or if I felt more confident about the behavior of the regional gaming consumer in the 2H23, I'd take a much more optimistic view of it.
Results
PENN reported results that were consistent with expectations and offered EBITDAR guidance for 2023. In 4Q22, revenues were $1.58bmillion, with EBITDAR coming in at $468 million. The regional EBITDAR of $487 million fell short of expectations due to lower margins, which were partially offset by the digital division's EBITDA beat. Management has also provided guidance for revenues of $6.15 to $6.5 billion and EBITDAR of $1.875 to $2 billion.
4Q22 earnings review
According to management, the 4Q22 performance was good thanks to the portfolio's solid performance between Christmas and New Year's. And, positively, this trend has persisted into this year January. Even though it shouldn't come as a surprise, it's nice to know that PENN isn't floundering because similar observations have been made by peers. Going into details, EBITDAR at the property level was $480 million, with margins of 35.2%. For land-based properties, PENN found declines across all age groups except the youngest, most likely as a result of the effects of December's extreme weather. The Interactive segment saw a 17% increase in revenue on the back of a 33% increase in handle for its Game Studios business and a 52% increase in gross gaming revenue for its iCasino. Another qualitative indicator is that 21 locations, or about 70 percent of the retail sector's EBITDA, are now using the 3Cs strategy (2) There are more than 136,000 mywallet users and over $80 million in deposits as of the quarter's end.
For 2023, management expects the Interactive segment to come close to breaking even in the first half, then incur modest losses in the 3Q before turning a profit in the 4Q and the full year. After hearing that PENN's most recent OSB launch was in Ohio, my hopes are high that the company will be able to expand its market share. Moreover, management has recently reported record volumes at their four Ohio properties without any major events, which I see as the success of their omnichannel approach.
Capital allocation
During 4Q22, PENN repurchased 2.87 million shares at an average price of $31.69, spending $91 million; an additional $31.5 million was spent after the quarter ended. After these buybacks, the total amount available for buybacks sums up to ~$867 million. Due to the completion of the Barstool Sports purchase and anticipated capital expenditures in 2023, PENN expects the rate of buybacks to slow. This may not sit well with some shareholders, but I believe it is appropriate for management to reinvest in growth projects that, in my opinion, will generate a higher internal rate of return than share repurchases.
In 2023, PENN anticipates spending $413 million on capital expenditures (including $25 million in insurance reimbursements). When broken down, the CAPEX budget shows $200 million going toward maintenance, $87.5 million going toward four growth properties, and $100 million going toward return on investment projects. To recap, work on these endeavors will begin in late 2023, and they are scheduled to debut by 2025.
Other thoughts
PENN reduced its marketing spending before implementing its technology stack, in line with the rest of the industry. Management, however, has plans to redouble their efforts to bring in new customers. Management may be touting lower CACs because the industry is becoming more rational, but I'm worried that they may actually increase as the market matures and attracting the incremental customer becomes more difficult.
Personally, due to the macro environment's volatility and ambiguity, I believe PENN's FY23 guidance is somewhat conservative. Even with all the macro uncertainties, only PENN has provided proper FY23 guidance, which should be taken as a sign of confidence.
Guidance
PENN guided $6.15 to $6.5 billion in revenues for FY23 and $1.875 to 2 billion in EBITDAR. Management has stated that they are being conservative with their projections because of macroeconomic uncertainty and increased competition for their properties in Lake Charles, Council Bluffs, and the Chicagoland area. Despite these challenges, I think this set of projections indicates adaptability in the cost structure; this was further highlighted by a recession sensitivity highlighted in the slide deck.
Valuation
Model walkthrough:
- Revenue is expected to meet FY23 guidance in revenue and EBITDA, then, growth should reaccelerate should slowly recover to historical norms
- EBITDA margins should continue to improve as PENN finish rolling out the new tech, and hopefully customer acquisition costs do not surge
- Current valuation is pretty fairly valued, as such no change to it
Conclusion
Overall, after hearing the 4Q call, I feel slightly more cautious. Even though 4Q results were in line with expectations and PENN's FY23 guide is conservative (in my opinion), I am now even more wary of the near-term outlook due to the uncertain macro and risk around tech implementation.
For further details see:
PENN Entertainment: Stock Is More Or Less Fairly Valued Now