• Penn's 57.9% sell-off in the past year coupled with its improving performance in online sports betting create an attractive entry point for investors.
• High-value U.S. casino stocks such as Penn and Boyd appear to be among the lowest-risk investments in the volatile gaming space at the moment.

It's been a brutal year for Penn National Gaming, Inc (PENN) investors, but the stock got a much-needed boost from a high-profile analyst upgrade on Monday.

The Analyst

Morgan Stanley analyst Thomas Allen upgraded Penn from Equal Weight to Overweight, but the analyst cut his price target from $55 to $51. Also in the note, Allen downgraded Boyd Gaming Corporation (BYD) from Overweight to Equal Weight and cut his price target from $82 to $76.

The Thesis

In the upgrade note, Allen said Penn's 57.9% sell-off in the past year coupled with its improving performance in online sports betting create an attractive entry point for investors. "We continue to believe PENN has a unique customer acquisition advantage over peers with its ownership of Barstool Sports in the US, theScore in Canada, and its >25 million legacy database of casino players," Allen said.

In addition, he projects Penn's U.S. business will generate break-even profits in 2022, another advantage over major U.S. competitors as interest rates continue to rise.

At the same time, Allen said Boyd has outperformed its domestic casino stock peer group by nearly 100% since March 2020. While he believes the stock's past outperformance has been warranted given its responsible capital allocation and profitability, Allen said he simply sees better opportunities elsewhere within the U.S. regional casino group.

Among the major U.S. casino operators, Allen's updated price targets suggest the most potential upside for Overweight-rated Caesars Entertainment Inc (CZR) at 48% followed by Penn at 37%.

Our Take

High-value U.S. casino stocks such as Penn and Boyd appear to be among the lowest-risk investments in the volatile gaming space at the moment, given both stocks trade at forward earnings multiples of under 15.

On the other end of the spectrum, casino stocks with high exposure to the Macau, China market are among the highest-risk stocks in the gaming space, given the uncertainty surrounding lingering COVID-19 lockdowns, general regulatory crackdowns, and the ongoing Macau gaming license renewal process.