Caesars Continues Paring Debt, Digital Unit Notches Profit

Posted on: November 1, 2023, 03:24h. 

Last updated on: November 2, 2023, 11:31h.

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

Caesars Entertainment (NASDAQ: CZR) delivered consensus-beating third-quarter results late Tuesday, telling investors its Caesars Digital unit posted EBITA (earnings before interest, taxes, depreciation, and amortization) profit of $2 million following a year-earlier loss of $38 million. The casino giant also continued whittling its debt burden.

Caesars Debt
Caesars Palace on the Las Vegas Strip. The operator continued reducing debt, but analysts are tepid on the stock. (Image: Getty Images)

Helped by record adjusted EBITDA of $1.04 billion, up from $1.01 billion in the same period last year, the Horseshoe operator slashed its outstanding liabilities to $12.45 billion as of September 30 from $13.08 billion at the end of 2022. Those ongoing debt-reduction efforts will likely spark delight among investors who have long viewed Caesars’ balance sheet as facing more headwinds than tailwinds.

We see the $7.2 billion in free cash flow (operating cash flow minus capital expenditures) that we expect in 2023-27, along with the $3.2 billion in liquid cash and available credit as of June 30, 2023, to be focused on reducing debt levels and investing in the digital sports and iGaming markets,” wrote Morningstar analyst Dan Wasiolek in a note.

While Caesars has no significant debt maturities coming until 2025, when $4.3 billion worth of its corporate debt matures, Wasiolek added the operator is likely to engage in only modest stock buybacks next year, and dividends are unlikely before 2026. Of the four largest U.S.-listed casino stocks by market capitalization, Caesars is the only one that doesn’t pay a dividend.

Analysts Still Supportive of Caesars … Sort Of

Entering this year, Caesars was one of the gaming equities Wall Street was most bullish on. Fast-forward 10 months, and the stock has been a dud, shedding 5%.

Following the third-quarter earnings report, analysts remain mostly constructive on the Harrah’s operator. But at least six cut price targets on the name on Wednesday. CFRA Research analyst Zachary Warring was part of that group, though he did upgrade Caesars to “hold” from “sell.”

“We believe the recent sell-off in shares (+30%) was warranted due to the company’s debt burden, but now believe shares trade near fair value, as the company has only $247M in debt maturing in 2024 and has plenty of assets to sell if necessary,” wrote Warring in a note to clients. “We would like to see continued progress on the balance sheet before expecting multiple expansion.”

Some analysts believe Caesars’ property-level margins should be boosted in the current quarter. That’s because the Rio Hotel & Casino Las Vegas, a low-margin venue, is out of Caesars’ portfolio.

Catalysts in Place for Caesars Rebound

The Las Vegas events calendar, including Formula One’s (F1) Las Vegas Grand Prix later this month, could be conducive to upside for Caesars stock.

“And we also have, obviously, F1 coming to Vegas, feel very, very good and no change in what we’re expecting in terms of lift in the quarter in the neighborhood of 5%,” said Caesars CEO Tom Reeg on a conference call with analysts.

Reeg added that the amount of credit play in Las Vegas during the F1 week could be on par with or exceed New Year’s Eve, and things are shaping up similarly for the Super Bowl next February, which Las Vegas is hosting.

In terms of potential property-level catalysts, Caesars will complete construction on permanent casinos in Columbus, Neb., and Danville, Va., next year, as well as an overhaul of Caesars Palace New Orleans. That’s pivotal, because New Orleans will host the Super Bowl in 2025.