Caesars Stock Remains Analyst Fave Despite Tepid Q2 Results

Posted on: August 2, 2023, 01:26h. 

Last updated on: August 2, 2023, 01:39h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Caesars Entertainment (NASDAQ: CZR) didn’t knock the cover off the ball Tuesday with its second-quarter results. But the stock remains a gaming favorite of sell-side analysts.

Caesars stock
Caesars CEO Tom Reeg in a CNBC interview. Management is one reason analysts love Caesars stock. (Image: CNBC)

In midday trading on Wednesday, shares of the Horseshoe operator are lower by more than 4%, joining the broader gaming equity complex to the downside. However, multiple analysts lifted price targets on Caesars today, despite lethargic second-quarter results caused by some tough year-over-year comparisons. Stifel analyst Steven Wieczynski remains confident in Caesars management, led by CEO Tom Reeg.

With CZR you get the best management team in gaming and a company that should produce significant free cash flow in any normalized environment,” wrote the analyst. “We believe the company can delever their balance sheet which should in turn bring longer-term investors into this story.”

Wieczynski reiterated a “buy” rating on the stock, boosting his price target to $74 from $68. That new forecast implies upside of about 27.5% from the August 1 close.

Debt Reduction Can Drive Caesars Stock Story

For years, Caesars has been one of the most indebted companies in the gaming industry. Altering that profile for the better is a top priority for management, and progress is being made on that front.

At the end of the first quarter, the gaming company had $13.2 billion in debt. As of June 30, that figure was down to $12.7 billion. Caesars also had $1.1 billion in cash, not including restricted cash of $205 million.

Those efforts, which could be spurred by an eventual asset sale, are being lauded by analysts and could put Caesars on a path to generate $5 billion in earnings before interest, taxes, depreciation, and amortization (EBITDA) in 2025. That implies leverage in the low 3x area and free cash flow in the area of $12 a share.

“We continue to recommend CZR given the deleveraging story, Vegas strength, and Digital path to profitability,” noted Macquarie analyst Chad Beynon. “While some may question CZR’s aspirational $5bn 2025E EBITDA figure, we believe the deleveraging story is more concrete as Digital is now self-funding and on the way to profitability.”

In one of the bright spots in the second-quarter earnings report, Caesars Digital notched its first profitable quarter.

Caesars Long-Term Outlook Attractive

For now, investors considering Caesars have to contend with the company’s large, though declining, debt burden and its ongoing battles against the specters of macroeconomic headwinds and increasing competition in some regional casino markets. On the other hand, the long-term outlook is arguably compelling.

That includes free cash flow eventually meeting or exceeding expectations, potentially positioning the Harrah’s operator to repurchase shares or explore accretive transactions.

“What will get more attention are some comments that CZR’s CEO made in which he indicated that over the next couple of years, the company could be in a position to explore ‘external opportunities,’” concludes Wieczynski. “What do those comments mean? We aren’t exactly sure, and we don’t believe there is anything coming imminently. But we do believe those comments should be taken seriously, and believe it’s a sign that CZR’s FCF generation should be so strong in the out-years that it will allow them to not only delever and buy back shares, but also explore other ‘material’ options.”