Caesars Stock ‘Undervalued’ After Recent Slide, Says Analyst

Posted on: December 15, 2021, 09:39h. 

Last updated on: December 15, 2021, 09:54h.

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

Gaming equities are slumping, and Caesars Entertainment (NASDAQ:CZR) isn’t proving immune to that trend.

Caesars stock
Strength in Las Vegas, home to Caesars Palace, is one reason Caesars stock can recover. Asset sales and debt reduction provide more catalysts. (Image: Las Vegas Review-Journal)

Shares of the Harrah’s operator are off 18.72 percent over the past month and are nearly 30 percent below the 52-week high, but some analysts aren’t throwing in the towel on the casino giant. In a note to clients today, B. Riley analyst David Bain reiterates a “buy” rating on Caesars stock, with a $191 price target. That’s more than double its Dec. 14 closing handle around $86.

Bain notes that Caesars is being hampered by non-recurring events, such as a slow recovery from Hurricane Ida in New Orleans, and some rooms in Atlantic City being offline because of enhancements. The operator’s regional portfolio remains solid and Las Vegas remains a source of strength for the company.

We raise Las Vegas property earnings before interest, taxes, depreciation and amortization (EBITDA) to $504.5 million versus Consensus Metrix’ average of $481.4 million and our $499 million,” said Bain. “CZR’s has not seen cancellations in bookings due to COVID variant headlines at this point.”

Caesars is the second-largest operator on the Strip, where it derives approximately 43 percent of its property EBITDA. Bain forecasts Strip revenue growth of 21 percent next year, citing expected strength in the first half of the year. It notes that forecast doesn’t include potential normalization of convention and international travel trends in the back half of 2021.

Caesars Stock Still Catalyst-Rich Story

Caesars stock isn’t escaping the recent bloodbath in the gaming space. But when that scenario eases, the Flamingo could be a leader among casino equities, because its has plenty of catalysts, including sizable debt reduction efforts.

“CY22E net leverage should go to ~3.3x versus CY21E ~7.1x given: Cash in hand + ~$1.4B in non-core asset sale proceeds in late 1Q22, over $3B from a likely Strip asset sale and over $1B in FCF in CY22E,” notes Bain.

Speaking of asset sales, it’s widely expected Caesars will sell one of its Las Vegas venues early next year, though it’s not yet clear if that transaction will be in the form of a sale-leaseback or an outright divestment. On Monday, MGM Resorts International (NYSE:MGM) announced the sale of Mirage’s operating rights for $1.075 billion, or 17x 2019 EBITDA, sparking optimism about the price point at which Caesars can offload a Strip assets.

Bain says this year’s Strip deals ranging from the Venetian to Aria/Vdara to Cosmopolitan, and now the Mirage, confirm an “accelerating trend,” and could indicate B. Riley’s assumed $3 billion in proceeds to Caesars via a Las Vegas asset sale could prove conservative. The figure could go as high as $3.75 billion, based on 15x $250 million in annual EBITDA at an unidentified Strip venue.

Don’t Forget Sports Betting

Analysts have long pointed to iGaming and sports wagering as longer-ranging catalysts for Caesars stock, and while the company’s efforts on those fronts are still in the early innings, Bain says state-level data indicate those plans are starting to bear fruit.

He points to recent data out of Indiana and Iowa as evidence Caesars’ new sportsbook app is winning market share. He adds Arizona, Colorado, Michigan, New Jersey, and Virginia are some of the states where the operator could be among the tops in terms of market share.

“Overall, we believe CZR online sports revenue share should reach 11 percent-plus from ~six percent over the next six months. We believe CZR’s iGaming market share ramp will begin next month, as content to put it at par with peers continue to gain approvals,” adds the analyst.