We Americans sure do love us some gambling. Maryland‘s July numbers just came in and it’s 20.5% (!) ahead of 2019. Casinos won $180 million and two extra weekend days obviously helped the tally. MGM National Harbor led with $72 million (+19%), outpacing Deutsche Bank analyst Carlo Santarelli‘s $64.5 million forecast. Maryland Live locked up a 35% market share and $63 million in winnings, up 28%. Penn National Gaming was just in time in reacquiring Hollywood Perryville on July 1, $9 million gross was a 34.5% improvement on two years ago. Ocean Downs leapt 28% to $10.5 million and Rocky Gap Resort‘s $6 million was a 22% gain. And in what has to be a triumph for Horseshoe Baltimore, it was flat with 2019, grossing $19 million. So there’s some hope for it yet. West Virginia casinos nudged 5% above 2019 numbers, driven by a 34% increase in table win. Hollywood Charles Town was up 7%, 1% higher at the slots and vaulting 42% at the tables.
Penn had Wall Street analysts eating out its hand after the latest earnings call. “Memes [and] grandiose proclamations run wild” wrote Santarelli. “Well, this one was interesting. Between the call commentary, 95% of which was focused on a business that, as we have said for some time, will likely never amount to more than 20% of total Company [cash flow], if it is wildly successful, the social media promotion that began immediately, and the post call livestream ‘pumpapalooza’, PENN threw all it had at the retail investment community to promote a transaction, which, in our view, speaks to exactly what we have been saying for some time, the sports, and especially iCasino, strategies aren’t working.” You see, Penn used the quarterly earnings announcement to hype its acquisition of OSB provider TheScore. “We get that PENN needed a tech stack, but buying a media Company for a tech stack, knowing the challenges peers have had buying tech companies with sports betting tech stacks, seems a bit strange, and frankly, risky. We also get that buying a Canada based company, which has billed itself as a presumptive leader in provincial sports betting, once legalized, seemingly makes sense, but if we have learned any lessons from the US market, the willingness to spend and lose is the path to market share gains, more so than media presence.”
Penn is paying $2 billion for TheScore, half cash and half stock, for cash flow that it diplomatically described as “long term” (read: speculative). So excited were Penn execs that they glossed over “very healthy” regional brick-and-mortar results while going gaga over their shiny new object. “That said, when you pay $2.0 bn and an almost 90% premium to the equity for a bolt on amenity to a sports and iCasino business, to augment a strategy which was billed as requiring little in the way of incremental spend, it likely requires some rationalization,” Santarelli noted. He reiterated his unusual “sell” rating on Penn, with a price target of $31/share. Considering that TheScore presently generates negative ROI we can’t blame him. TheScore does have proprietary trading technology and Penn wants to get away from third party vendors … but the tech is still a long way from deployment, to put it generously.
Barstool Sports will launch soon in Colorado, New Jersey, Tennessee, Virginia and Arizona, putting it just one state shy of its goal of being in 10 states by Dec. 31. Same-game parlays will be added to Barstool’s menu, raising the hold percentage. “We continue to marvel at the goal from OSB operators to achieve higher hold percentages, as we have seen this strategy employed in regional casinos and it tends to merely lower handle over time,” Santarelli mused. As for Internet gambling, Penn wants to do better and will introduce third-party slots and tables, as well as live-dealer games, based in New Jersey. Barstool-themed games will be added, too. That’s not all. Penn plans to open Barstool-branded sports bars in Chicago and Philadelphia, as well as five more walk-up sports books. Don’t look for profits, though: Penn is preparing a big, aggressive promotional push as we head into NFL season. (Santarelli: “We thought this was what the $450 mm Barstool acquisition did?”) As for New York State, puzzled Penn execs called it “complicated” and a “conundrum.” Thank you, Andrew Cuomo. (Not.) Unfortunately for Penn, its tech stack won’t be ready when requests for proposals are due, putting it at a disadvantage.
Oh yeah, what about casinos? Remember them? Penn drew $652.5 million in the Northeast, $368 million in the South, $140.5 million out West and $295 million in the Midwest. This was, on the whole, better than expected.
Compared to Santarelli’s skepticism, Credit Suisse analyst Ben Chaiken was feeling the love for TheScore buy. “Our take is that PENN is experiencing significant growth in its younger demo (in part driven by Barstool and branded sports books), and still has not fully recovered its more traditional patrons, suggesting upside to numbers or at a minimum some insulation,” he wrote, setting a price target of $136. “SCR was one of the most attractive takeover targets in our coverage, given a large customer base (4m users) and a high quality and underappreciated sports media and sports betting product (currently available in the US, and which will be rolled out in Ontario later this year).” Positives included that promised tech platform, being able to sever costly ties with Kambi and subscribers who can be rolled into Barstool’s customer base. “PENN essentially just paid ~$500/user for access to a highly relevant sports betting base (vs. industry $400-$800 CAC) and in addition got a tech solution,” opined Chaiken.
Truist Securities‘ Barry Jonas pointed out that the transaction was “timely,” given that Canadians have only just been given permission to place single-game wagers and that Penn will be able to swing the deal without increasing leverage. Management predicted that the much-prized tech stack should be available by the start of the 2023 NFL season. “We believe theScore’s unique media platform will complement the reach of Barstool Sports and its personalities,” Jonas wrote. “In our view, the addition of the theScore adds more certainty to PENN being a player in the [North American] market.” He thinks Canada alone will be a $4.4 billion USD market by 2030, once Internet gambling goes into the equation.
As for casinos, “All segments beat expectations on both [cash flow] and revenue as management noted gaming metrics are improving Q/Q, including improved visitation and length of play across all age groups in PENN’s player database while spend-per-visit has remained high since reopening. Similarly to other operators, management noted the core gaming customer has returned while vaccine distribution ramps as the younger demographic’s engagement (and overall gaming strength) has continued into Q3 despite other entertainment options coming back. Management also noted unrated play has performed well while PENN has converted a strong number to their mychoice loyalty program.” As the cherry on the sundae, Penn Interactive is starting to break even, despite only having a four-state presence. The company has also gone cashless at The Meadows and Hollywood Penn National, both in Pennsylvania.
Thanks to Penn having leaked 2Q21 numbers last month, JP Morgan‘s Joseph Greff was unsurprised by the earnings call. The company even gave a 3Q sneak peak by touting its July results. As for TheScore, “The strategic rationale to us, initially, makes sense. [It] is the number one sports app in Canada and the third most popular sports app in all of North America.” Describing Barstool’s market share as “lackluster” (we agree), Greff thought adding TheScore “improve upon customer acquisition, engagement, and retention.” He agreed with all of Penn’s arguments in favor of the purchase, adding that he believed it could generate major returns by Year Two (i.e., 2023). “Given the Canadian gaming market opportunity, PENN intends to operate theScore as a stand-alone business, headquartered in an expanded Toronto office.”
Calling Penn stock “a lead balloon” (it has shriveled from a mid-March high of $136 to $66), Greff opined that the market values the casino portfolio fairly but puts no stock (pun intended) in i-gaming and OSB. Au contraire, he argued, TheScore deal “should/could work on Canada alone.” He figures it can pay off TheScore gets just 20% of the Canuck sports-betting market. He was also impressed with the casino-based numbers, which well exceeded 2019 and were toward the high end of Wall Street estimates. One last ‘Stool sample: The collegiate Arizona Bowl will now be the Barstool Sports Arizona Bowl. Higher education has not been slow to get in bed with Big Gaming.
DraftKings posted a $305.5 million loss last quarter. In other words, business as usual. It spent $187 million to acquire $297.5 million in net revenue. Administrative costs were also steep, exceeding even marketing. Call us crazy but this isn’t a business model that inspires confidence unless you’re a blue-sky stock picker. Exuberant price targets are predicated on a pot of gold at the end of a distant rainbow, one that seems to recede with each quarter. The irony is that DraftKings actually did better than analysts expected. Since it beat The Street’s estimates, DraftKings raised its revenue forecast for the year to $1.3 billion. The sports-betting giant continues to post negative ROI but the news that the latter was much less than expected in 2Q21 was practically cause for celebration. The company was also able to boast a larger-than-expected base of unique players, some 1.1 million. On a not-so-good note, DKNG has been subpoenaed by the SEC, in the wake of the blockbuster Hindenburg Report. Seems the feds want to know more about SBTech and potential nondisclosure of business dealings that weren’t entirely kosher.
Chicago Mayor Lori Lightfoot (D) is pondering pushing back the deadline for proposals for a casino by two months (to Oct. 23). Only one application has been submitted, from favorite son Rush Street Gaming. This is a major embarrassment for Lightfoot and given that Rush Street Chairman Neil Bluhm‘s daughter is a rainmaker for Lightfoot, giving him the casino outright would look like the fix was in. One unnamed company is expected to submit a proposal and three others are “considering” it. Political commentator Greg Hinz writes, “But without knowing the [identity] of that prospect and the three new firms, it’s impossible to know how real the competition is, or whether a delay is just designed to provide political cover for an eventual Bluhm/Related pick.” (We suspect the latter.) If and when Rush Street wins the bid, it would build on Related Midwest-owned land a mile west of Soldier Field. Of course, Hard Rock International is still theoretically in the running but having just opened in Gary, Hard Rock is doubling down in Terre Haute and tripling down in Rockford. A multi-billion-dollar investment in Chicago proper would seem the height of redundancy. Say what you like, the Chicago-casino saga is always good for some much-needed levity.
Jottings: Caesars Rewards members get $6 in free slot play (up from $5) at Harrah’s Resort in Atlantic City on the 8th, 15th, 22nd and 29th of this month. We approve of any promotion that values players more highly … The Gila River Hotels & Casinos chain in Arizona will be debuting new Class III games, courtesy of its recent compact with the state. Blackjack, roulette, craps and even midi-baccarat will be available. Watch out for that baccarat volatility, Gila River … Pahrump gets its moment in the sun with HBO‘s Small Town News. It’s a “reality” show about KPVM-TV but one review says “the show has an opportunity to mock its characters, but does not; there’s no judgment coming from the soundtrack or the editing.” … A defunct Sears store will be resurrected as Hollywood Casino York on August 12. Players will find 510 slots, 30 table games and a Barstool-branded sports book, all built for a thrifty $120 million … Casino KC, previously Isle of Capri Kansas City is now Bally’s Kansas City Casino. A $40 million expansion begins August 18. Bally’s has also entered a deal with Boot Hill Casino in Kansas proper to host its online-sportsbook app … Caesars Entertainment also rebranded a Mississippi riverboat as Trop Casino and is vigorously refurbishing it at present. It sounds like the property really needed it, to give El Diablo its due … Money-losing Caesars has unloaded its European and African casinos to Silver Point Capital. The purchase price was undisclosed but will surely be handy for paying down that $17 billion debt load.