Top executives of Penn National Gaming ignored a recent letter from activist investors during a meeting with J.P. Morgan analyst Joseph Greff. The Donerail Group had demanded that Penn put itself up for sale to recoup losses incurred while pursuing online sports betting.

Penn “continues to be focused on top-of-funnel acquisition from the ESPN database and reiterated its laser focus on ESPN BET product improvements and ESPN ecosystem integrations ahead of the football season, which management believes will ultimately grow its wallet share,” Greff reported. “Unsurprisingly, management did not comment on recent activism headlines.”

The analyst met with Penn CEO Jay Snowden, CFO Felicia Hendrix, and Treasurer Mike Nieves. They told Greff they continue to perceive “strong and improving trends” in both downloads of ESPN Bet and market share.

Their stated goals include improving ease of use and greater parity with market leaders by the time football season rolls around. They believe college and NFL action will improve their share of consumer spending.

Penn also execs look forward to the July arrival of new Chief Technology Officer Aaron LeBerge, who “will likely bring an experienced team with him and sees increased integrations with ESPN properties improving the user experience and increasing engagement.”

Turning to the recent Illinois tax hike on sports betting, Greff was told ESPN Bet’s levy will go from 15 percent to the low 20th percentile; Penn also doesn’t see greater risk of tax hikes spreading to other states. In highly taxed (51 percent) New York state, Penn said it will be “efficient” in its promotional activity. Leadership said it’s “willing to under-index on market share in the state to operate profitably.”

Taking a long-term view, Penn executives stated they can operate profitably with 10 percent market share, plus greater cost efficiencies. They believe this is particularly true “around the potential for meaningfully lower marketing spend on non-ESPN properties than current expectations.”

Before leaving the digital sphere, Penn leadership said they’re still on pace to go live with a standalone Hollywood Casino application in early 2025. This would obviate the need for users to get to digital slots and online table games by having to go through ESPN Bet first.

Conceding that momentum to further legalize igaming is “stagnant,” execs told Greff that Illinois, Indiana, and Iowa are the likeliest to vote it into law. Once that happens, they expect to see a domino effect in other states as they look to protect their tax base,

Turning to brick-and-mortar gambling, the trio said demand “appears stable despite some continued softness in unrated play, particularly in the South region.” Weaknesses in April play were calendar-driven, with momentum improving in May and a favorable calendar in June.

Reported Greff, “We get the sense that expectations for 2Q24 land-based results are generally near our/Street estimates, with management effectively managing margins to offset higher labor cost (particularly in [Atlantic City] and Detroit), property insurance, and competitive openings in certain markets.”

The analyst was told to expect meaningful curbing of digital losses, along with the end of significant property-improvement spending. This will, in turn, bring net leverage to the levels it was at before the ESPN Bet initiative.

Greff noted that Penn will be focused on a $750 million share-buyback initiative, along with continued ramping up of ESPN Bet. He said the company “will have the option to opportunistically return capital to shareholders, potentially sometime in 2025.”

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