Caesars Slumps Following Merger, But Analyst Sees Long-Term Buying Opportunity

Posted on: July 28, 2020, 09:27h. 

Last updated on: July 28, 2020, 02:05h.

Todd Shriber @etfgodfather Read More

Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Shares of Caesars Entertainment (NASDAQ:CZR) are off about 25 percent since the acquisition creating the gaming Goliath was finalized earlier this month. But one analyst views the weakness as an opportunity for long-term investors to get involved with the name.

In a new note to clients, Stifel analyst Steven Wieczynski said there are some overhangs that could weigh on the stock over the near-term. But, he adds, his bullish thesis on the name hasn’t changed, and that it could be a $100 stock in the future. Previously, Wieczynski was enthusiastic on Eldorado Resorts, the company that bought Caesars and took that name.

While we fully expect shares could remain pressured in the near-term until we get more clarity around the virus situation and its ultimate impact on gaming trends (especially Las Vegas), we believe this name is set up well for the long-term, given management’s ability to create significant shareholder value,” Wieczynski said.

He previously said Eldorado could become a $100 stock, through the path to triple-digit territory would not be linear. In his most recent note, he places a “buy” rating on the new Caesars, with a price target of $60, roughly double where the shares trade at this writing.

Multiple Reasons to Sell 

As Wieczynski points out, several factors explain the recent weakness in Caesars stock. First, financier Carl Icahn — widely viewed as the architect of the deal creating the new Caesars — elected to take cash for his holdings, not expand his equity position. In fact, he’s dumped most of his stock in the company, reducing his stake to just two percent from 10 percent, sparking a wave of selling among other professional investors.

Second, Las Vegas Sands (NYSE:LVS) said last week Sin City is dealing with a challenging operating environment. Business and meeting traffic remains scant, leading to low weekday occupancy rates. And the surveys suggest many leisure tourists are apprehensive about traveling until a coronavirus vaccine is developed. As Wieczynski notes, these points are relevant to the new Caesars, because the company will derive approximately 45 percent of its earnings before interest, taxes, depreciation and amortization (EBITDA) from the Strip.

And finally third, general doom and gloom around certain states seeing an increase in virus cases and the potential for new shutdowns,” said the analyst. “Those concerns won’t help any regional gaming company, as the fear will be an employee gets the virus, then infects the rest of the employee base, then the property has to be shut down.”

He points out the new Caesars has $3 billion in liquidity, giving it a cushion of 10 to 11 months to survive in a zero-revenue environment.

Still a Top Idea

Trading around $30, Caesars stock resides at its lowest levels in two months. But Wieczynski said his long-term view of the name hasn’t changed, that it still has triple-digit potential, and that it’s the top pick in Stifel’s gaming coverage universe.

“As we have said before, there will clearly not be a linear path to triple-digit land, given there will continue to be some rocky trading patterns in the near-term until the COVID-19 noise/overhang dissipates,” he said.

The analyst acknowledges that his $60 price estimate, a double from current levels, includes “conservative” assumptions about the company’s iGaming and sports betting units.