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On Wednesday, shares of PENN Entertainment Inc (NASDAQ: PENN) climbed to $20.65, marking a notable 12.9% surge over the past week, following news of a potential proxy battle as activist investor HG Vora signaled intentions to nominate its own slate of board candidates.
According to InvestingPro analysis, PENN's stock is currently trading near its Fair Value, with significant price volatility observed in recent months. The move aims to address concerns over the company's performance and capital allocation, particularly in its interactive business division.
The escalation comes after HG Vora initially engaged with PENN over a year ago, revealing a significant economic interest in the company and expressing dissatisfaction with the stock's persistent underperformance and the issuer's capital allocation track record. InvestingPro data reveals concerning fundamentals, including a high debt-to-equity ratio of 3.69 and negative earnings per share of -$3.53 over the last twelve months.
Discover more insights with InvestingPro's comprehensive research report, available for PENN and 1,400+ other US stocks. Although HG Vora has reduced its direct ownership to below 5% to circumvent gaming licensing requirements, it has maintained its economic interest through swap agreements.
The tension is set against a backdrop of broader shareholder dissatisfaction. In May 2024, Donerail Group publicly criticized PENN's interactive strategy, suggesting the board consider selling the land-based business. Despite PENN's interactive business expecting to report approximately $500 million in EBITDA losses for 2024, there have been some positive developments, including the integration with ESPN, which has led to increased active users and reduced promotional spending.
Raymond (NS:RYMD) James analyst RJ Milligan has chosen to maintain a Market Perform rating on PENN stock amidst these developments. This aligns with the broader analyst consensus, as tracked by InvestingPro, with price targets ranging from $18 to $30 and multiple analysts recently revising earnings expectations downward.
InvestingPro subscribers can access additional insights, including 7 more key ProTips and detailed financial metrics that could impact PENN's future performance. The firm acknowledges the proactive measures taken by PENN to improve its interactive business but notes that the outcome of HG Vora's potential influence on the board remains uncertain.
Milligan highlights the various strategic options that could be explored if HG Vora gains board seats, such as spinning out or selling the interactive business, selling the entire company, or replacing management.
However, he emphasizes that any such path could be complex and challenging, leading Raymond James to advise caution and maintain their current rating for PENN stock.
In other recent news, PENN Entertainment has been making significant strides in expanding its market reach and enhancing its financial standing.
The company recently secured a long-term partnership with Monumental Sports & Entertainment, providing online market access for its ESPN BET platform in Washington D.C. This move is expected to boost fan engagement and increase PENN's visibility in the region.
In a bid to improve its financial position, PENN Entertainment has successfully negotiated reduced interest rates on its existing term loans, a move that could potentially lower its debt cost. The company also reported a stable financial performance in its Q3 earnings call, with retail revenue reaching $1.4 billion and adjusted EBITDA at $472 million.
On the technology front, PENN Entertainment launched its Hollywood Casino (EPA:CASP) mobile application in Pennsylvania, which features over 700 iCasino games. The company plans to expand the application to more jurisdictions in early 2025.
In terms of analyst coverage, JPMorgan upgraded PENN Entertainment from Neutral to Overweight, setting a new price target at $27.00, based on anticipated growth from its investments in retail projects. However, BofA Securities initiated coverage on PENN Entertainment with a Neutral rating, forecasting a 3% lower core regional EBITDA by 2025 due to increased supply and margin pressures.
As part of its growth strategy, PENN Entertainment has four ongoing projects, including the Hollywood Joliet, expected to open in the second half of 2025.
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