Caesars Still Top Gaming Idea as Analyst Lifts Price Target

Posted on: September 4, 2020, 09:48h. 

Last updated on: September 4, 2020, 10:44h.

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

Broad equity markets tumbled Thursday, and those declines are extending into Friday, taking gaming stocks along for the ride. But analysts remain enthusiastic about Caesars Entertainment (NASDAQ:CZR).

Caesars Paris Las Vegas
Caesars’ Paris on the Las Vegas Strip. An analyst remains bullish on the operator’s stock. (Image: ABC News)

During the market bloodbath of the past two days, Caesars stock hasn’t been immune. But the Flamingo operator is holding up better than many of its rivals, and earning some praise in the process. In a recent note to clients, Stifel analyst Steven Wieczynski reiterated a “buy” rating on the Caesars Palace operator, while boosting his price forecast on the name to $67 from $63.

We are raising our price target on CZR to $67 (+4), as we have increased some of our long-term sports betting/iGaming assumptions,” said the analyst. “We fully admit we were overly conservative with our previous sports betting/iGaming forecasts, and believe our estimates are now more realistic.”

Caesars’ online casinos and sports wagering business are recently drawing increasing attention. That includes speculation that the company could combine that segment with William Hill in a joint venture that would feature a spin-off to public investors.

Wieczynski’s new price projection on Caesars stock implies an upside of nearly 40 percent from where it trades at this writing.

More Than Sports

Caesars’ internet casinos and sports wagering units are garnering plenty of attention because those are the shiny new growth objects in the gaming industry. Plus, management, whether by incident or intent, is fostering some of that focus by noting that business could generate up to $700 million in revenue next year. A decision on the segment’s fate within the broader Caesars portfolio could be revealed before the end of 2020.

Still, there’s more to the story, including ongoing strength at regional gaming properties and the company’s leverage to positive developments on the coronavirus vaccine front via its status as one of the largest operators on the Las Vegas Strip.

It could just be political posturing with Election Day less than two months away. But in recent days, President Trump discussed chances for a vaccine to be ready before the end of this year. That would be a major boost to Sin City’s recovery efforts.

“CZR remains our top idea across our entire coverage universe, and we still believe this will be a triple-digit stock at some point in the not-too-distant future,” said Wieczynski. “While there might not be a linear path to triple-digit land, given there could be some rocky trading patterns in the near-term until the COVID-19 noise/overhang dissipates, we have even more conviction in management’s synergy opportunity, as well as the FCF potential of the combined entity.”

The company took a modest step toward paring costs and boosting cash flow, announcing the sale of Harrah’s Louisiana Downs yesterday for $22 million.

Cheap Stock Today

Up 34 percent over the past month, it may be difficult to call Caesars stock inexpensive after a move like that. But Wieczynski lays out a case for bigger gains over the long-term if free cash flow (FCF) generation targets are met or topped.

The analyst says if the newly combined Caesars can generate $3.7 billion to $4 billion in earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR), it can post $8 to $9 a share in FCF even after $2.3 billion in rent, interest, and maintenance costs are subtracted.

“So if we still believe the combined company can generate close to $8.50/share in FCF (normalized environment), which, based on where gaming companies typically trade (10x-12x FCF), we still think shares are worth ~$85-$102,” he said.