It’s time for investors to take a break on shares of Caesars Entertainment and Penn Entertainment, Bank of America said Wednesday. Analyst Shaun Kelley downgraded both gaming stocks to neutral from buy and lowered the bank’s price targets to $55 and $40, respectively. He said in the note to clients Wednesday that growth trajectories are stabilizing for both stocks, with shares shedding more than 2% before the bell. “Gaming, and esp. regionals, are the largest ‘over-earners’ vs. pre-COVID in our coverage, but unlike other areas in consumer discretionary, estimates have not yet come down, leaving potential risk should the consumer soften,” he said. “CZR and PENN both skew to the higher risk side of our coverage, and we are taking a more defensive stance until the macro-outlook or valuations become more compelling.” While the gaming sector has held up better than some other consumer discretionary areas, the industry isn’t immune to inflation, rising unemployment and a slowdown in consumer spending, Kelley said. Both stocks are also struggling to gain solid digital market share Caesars and Penn shares have plummeted 44% and 32% this year, respectively, with Bank of America’s fresh targets suggesting a modest upside for both stocks from Tuesday’s close. Going forward, don’t be surprised if Caesars struggles to gain market share as it focuses on its digital business and pays down its debt, Kelley said. “Rising interest and rent, and a weak asset sale market have slowed deleveraging, and we believe it could take 3+ years to reach leverage levels that make consistent shareholder returns possible,” he wrote. “Given competition, it’s unlikely we’ll see online reach its margin potential in the next 1-2 years.” For Penn, Kelley anticipates risks as momentum from its stake in sports media company Barstool unwinds. — CNBC’s Michael Bloom contributed reporting
