Caesars Soars as JPMorgan Sees ‘High-Risk, High-Reward’ Opportunity

Posted on: August 13, 2020, 10:22h. 

Last updated on: August 13, 2020, 12:05h.

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

In one of the best days in its new form, Caesars Entertainment (NASDAQ:CZR) is higher by nine percent in midday trading. That’s after JPMorgan restarted coverage of the gaming company with an “outperform” rating.

JPMorgan Rates Caesars With "Outperform"
Caesars Palace in Atlantic City. JPMorgan is bullish on the new Caesars stock, citing regional casinos and sports betting. (Image: CNBC)

It’s been less than a month since the company formerly known as Eldorado Resorts completed its $17.3 billion takeover of Caesars, assuming that venerable name in the process. Wall Street is mostly bullish on the largest domestic gaming company. Citing frequently discussed factors, such as strength in the operator’s regional portfolios and sports wagering, JPMorgan calls the new Caesars an “attractive” opportunity among gaming equities.

We view CZR as a high-risk, high-reward stock (35% upside) for investors seeking exposure to the recovery of the US regional gaming market, which has a permanently lower operating expense structure that should yield higher than historical margins,” said the bank in a note to clients.

Better-than-expected traffic and higher margins, particularly at properties in the South, are propping up Caesars’ regional portfolio. That’s while the operator waits for destination markets, namely Las Vegas, to rebound from the ill effects of the coronavirus pandemic.

Sports Betting Surge

JPMorgan speaks glowingly about Caesars’ exposure in the online casinos and sports wagering markets, segments that have the investment community currently enthralled.

Previously, Caesars was a retail sports betting behemoth with a growing internet casino operation in states where that activity is permitted. Now that more states are expected to permit one or both of those pastimes as avenues for bolstering revenue following COVID-19, analysts are ratcheting up estimates.

Some are saying sports betting alone could swell to $28 billion, with online casinos jumping to $9.5 billion over the next several years.

JPMorgan likes “the attractive growth potential of the US sports betting/iGaming industry, a segment that likely will be broken out/separated from land-based casinos sooner rather than later — a potential catalyst for valuation multiple expansion and an opportunity we believe is worth $17 per share, or ~46% of the current share price,” according to the bank.

Big Bucks Bets

On a conference call with analysts and investors last week, Caesars CEO Tom Reeg said a “permanent solution” for the company’s iGaming and sports wagering businesses could be revealed by the end of this year.

Last year, Reeg mentioned the units could be spun off to generate value for investors because the old Caesars equity didn’t adequately reflect the growth opportunity offered by those businesses. He was careful to note the company won’t react in knee-jerk fashion simply because markets are assigning lofty multiples to online gaming firms.

The CEO said internet casinos and sports wagering could generate $600 million to $700 million in revenue for the company in 2021, with New Jersey iGaming alone contributing $125 million.

JPMorgan has a $50 price target on Caesars, implying roughly 25 percent upside from current levels. But that’s also slightly below the Wall Street average of $52.