Company Reports

Coming into Caesars’ first-quarter results, we think concerns around the company’s 6 times debt/adjusted EBITDA in a landscape of high financing costs, as well as incremental digital competition, have hindered recent share performance. With the firm weighed down by some nonrecurring events (weather, weak hold, tough Las Vegas comparison, digital launch in North Carolina), it had a 3% first-quarter sales decline (down 1% adjusted for an asset disposition), along with EBITDAR margin deleverage of 274 basis points to 31.1%, behind our 2024 forecasts for 3% growth and deleverage of 42 basis points. We plan to reduce our 2024 sales forecast to around 2%-3% growth, with EBITDAR contracting roughly 60 basis points. As a result, we plan to lower our $73 fair value estimate by a mid-single-digit percentage, offering value for long-term-oriented investors, although we think shares are likely to remain volatile in the near term.

Pennsylvania and Michigan released sports wagering and revenue data through February, including individual operator performance. The data supports our view that no-moat Penn is grabbing share at the hands of no-moat peers MGM and Caesars, while no-moat DraftKings adds to its leading position due to first mover and technology advantages. In fact, since launching ESPNBet in November, Penn has averaged a 4- and 7-percentage-point sports revenue share improvement over the prior year in Pennsylvania and Michigan, respectively, reaching a high-single-digit share of both markets and aligning with our forecast. Meanwhile, MGM’s share over the same time is lower by 3 and 5 percentage points; Caesars’ is flat and down 3 percentage points; and smaller competitors are collectively lower by 3 and 3 percentage points. Conversely, DraftKings’ share is up 7 and 11 percentage points.

As a result of the acquisition of the legacy Caesars business by Eldorado (closed July 2020) and its leading omnichannel presence, we estimate Caesars holds around a high-teens revenue share of the $66 billion domestic commercial casino gaming market. The acquisition roughly doubled the company’s US portfolio to about 50 properties while lifting its loyalty membership to over 60 million from 55 million. Caesars has realized over $1 billion in combined sales and cost synergies from its merger with Eldorado, representing around a 30% increase to pro forma 2019 EBITDAR. Before this recent combination, legacy Eldorado successfully integrated the Isle and Tropicana acquisitions in 2017 and 2018, respectively, with both deals driving about a 30% return on investment, based on our calculation.

As a result of the acquisition of the legacy Caesars business by Eldorado (closed July 2020) and its leading omnichannel presence, we estimate Caesars holds around a high-teens revenue share of the $66 billion domestic commercial casino gaming market. The acquisition roughly doubled the company’s U.S. portfolio to about 50 properties while lifting its loyalty membership to over 60 million from 55 million. Caesars has realized over $1 billion in combined sales and cost synergies from its merger with Eldorado, representing around a 30% increase to pro forma 2019 EBITDAR. Before this recent combination, legacy Eldorado successfully integrated the Isle and Tropicana acquisitions in 2017 and 2018, respectively, with both deals driving about a 30% return on investment, based on our calculation.

We think the main takeaways from no-moat Caesars’ fourth-quarter results were the solid revenue and EBITDA production of its digital business despite incremental competition from no-moat Penn’s ESPN Bet November launch. We don’t plan any material change to our $80 fair value estimate but expect to adjust our Morningstar Uncertainty Rating to High from Very High based on our quantitative model. Although we see shares as attractive for long-term investors, we posit price action could remain volatile as investors weigh the company’s roughly 6 times debt/EBITDA (including financial and lease obligations) in a high-financing-cost environment.

As a result of the acquisition of the legacy Caesars business by Eldorado (closed July 2020) and its leading omnichannel presence, we estimate Caesars holds around a high-teens revenue share of the $60 billion domestic commercial casino gaming market. The acquisition roughly doubled the company’s U.S. portfolio to about 50 properties while lifting its loyalty membership to over 60 million from 55 million. Caesars has realized over $1 billion in combined sales and cost synergies from its merger with Eldorado, representing around a 30% increase to pro forma 2019 EBITDAR. Before this recent combination, legacy Eldorado successfully integrated the Isle and Tropicana acquisitions in 2017 and 2018, respectively, with both deals driving about a 30% return on investment, based on our calculation.

No-moat Caesars’ shares jumped 5% in after-hours trading from oversold conditions as the company posted third-quarter results that are tracking toward our full-year projections. We don’t expect to materially change our $81 fair value estimate and view shares as undervalued, as we believe investors have placed too much angst over the company’s debt position, which is more than manageable.

As a result of the acquisition of the legacy Caesars business by Eldorado (closed July 2020) and its leading omnichannel presence, we estimate Caesars holds around a high-teens revenue share of the $60 billion domestic commercial casino gaming market. The acquisition roughly doubled the company’s U.S. portfolio to about 50 properties while lifting its loyalty membership to over 60 million from 55 million. Caesars has realized over $1 billion in combined sales and cost synergies from its merger with Eldorado, representing around a 30% increase to pro forma 2019 EBITDAR. Before this recent combination, legacy Eldorado successfully integrated the Isle and Tropicana acquisitions in 2017 and 2018, respectively, with both deals driving about a 30% return on investment, based on our calculation.

We think investors are severely discounting no-moat Caesars’ resilient demand in Vegas, ramping digital business, and Exemplary capital allocation track record. We don’t plan to materially alter our $81 per share fair value estimate, and think shares deserve to trade around 10-11 times 2024 EV/EBITDA versus the current roughly 9 times level.

As a result of the acquisition of the legacy Caesars business by Eldorado (closed July 2020) and its leading omnichannel presence, we estimate Caesars holds around a high-teens revenue share of the $60 billion domestic commercial casino gaming market. The acquisition roughly doubled the company’s U.S. portfolio to about 50 properties while lifting its loyalty membership to over 60 million from 55 million. Caesars has realized over $1 billion in combined sales and cost synergies from its merger with Eldorado, representing around a 30% increase to pro forma 2019 EBITDAR. Before this recent combination, legacy Eldorado successfully integrated the Isle and Tropicana acquisitions in 2017 and 2018, respectively, with both deals driving about a 30% return on investment, based on our calculation.

We think investors are unduly focused on macroeconomic growth and credit availability concerns, thoroughly underappreciating no-moat Caesars’ resilient demand in Vegas, ramping digital business, and improved balance sheet. We don’t plan to materially alter our $81 per share fair value estimate and see shares offering an attractive risk/reward.

As a result of the acquisition of the legacy Caesars business by Eldorado (closed July 2020) and its leading omnichannel presence, we estimate Caesars holds around a 10% revenue share of the $100 billion domestic casino gaming market. The acquisition roughly doubled the company’s U.S. portfolio to about 50 properties while lifting its loyalty membership to over 60 million from 55 million. Caesars has realized over $1 billion in combined sales and cost synergies from its merger with Eldorado, representing around a 30% increase to pro forma 2019 EBITDAR. Before this recent combination, legacy Eldorado successfully integrated the Isle and Tropicana acquisitions in 2017 and 2018, respectively, with both deals driving about a 30% return on investment, based on our calculation.

With Caesars having already announced fourth-quarter results in January (roughly in line with our forecast), the key takeaways from the call were digital segment EBITDA reaching its 50% return on investment target in 2025, and there being no signs of demand slowdown so far in 2023 in its U.S. casino businesses. We think shares have been unduly held back by cyclical and balance sheet cost concerns. We maintain our view that Caesars’ revenue will grow further in 2023, driven by the human-ingrained desire for travel, shift to service consumption, remote work flexibility, digital business strength, and a strong event calendar in Las Vegas. We plan to increase Caesars’ $80 fair value estimate around a low-single-digit percentage and think investors should consider dealing themselves shares.

We believe no-moat Caesars’ preannounced fourth-quarter update continues to support our stance that investors are too concerned about the company’s demand, digital spend, and liquidity profile. We are maintaining our $80 fair value estimate and view Caesars' shares as attractive, despite the more than 50% appreciation since the end of September.

As a result of the acquisition of the legacy Caesars business by Eldorado (closed July 2020), we estimate Caesars holds more than a 10% revenue share of the domestic casino gaming market. The acquisition roughly doubled the company’s U.S. portfolio to about 50 properties while lifting its loyalty membership to over 60 million from 55 million (loyalty stood at 65 million at 2021's end). Caesars has realized over $1 billion in combined sales and cost synergies from its merger with Eldorado, representing around a 30% increase to pro forma 2019 EBITDAR. Before this recent combination, legacy Eldorado successfully integrated the Isle and Tropicana acquisitions in 2017 and 2018, respectively, with both deals driving about a 30% return on investment, based on our calculation.

We see no-moat Caesars’ third-quarter earnings supporting our case that investors are too fearful of deteriorating demand and anemic digital profits. We don’t expect a material change to our $80 valuation, but view Caesars shares as attractive, despite the more than 50% appreciation during the past month (including a 6% move higher in reaction to Caesars’ earnings update).

Caesars’ leadership has shown exemplary 30%-40% investment returns on recent acquisitions, has a leading digital gaming presence, and has seen a robust recovery at its domestic casinos. Yet, its stock has gone bust in 2022, dropping around 60% year-to-date (through Oct. 18) compared with about a 20% fall for the Morningstar Global Markets Index. We attribute the share underperformance to misguided angst around Caesars’ ability to service debt, improve digital profits, and survive an economic growth slowdown. We are upbeat on Caesars' liquidity profile, with $1 billion in cash and $2 billion in revolver capacity, strengthened by our forecast that it should generate more than $13 billion in free cash flow during 2022-26 and could ultimately offload a Las Vegas asset to yield as much as $3.5 billion. In our view, this should prove sufficient to service the $11.3 billion in debt set to mature in 2024-25. Also, we view Caesars' digital gaming position as irrefutable, with initial losses waning, maturing markets profitable, and a leading loyalty (60 million members) and omnichannel (50 physical casinos) presence allowing for revenue share and margin expansion in the $28 billion online sports betting and iGaming industry by 2030. Finally, presuming history is a guide (that is, 1991 and 2000), we don't believe a mild economic contraction would be debilitating, as Las Vegas gaming revenue levels have tended to hold steady in those environments.

Upon reassessing capital costs across our gaming landscape, we have adjusted no-moat Caesars’ cost of debt to 10% from 8%, while maintaining its cost of equity at 11%. As a result, our Caesars fair value estimate moves to $80 per share from $95, still placing shares in undervalued territory.

As a result of the acquisition of the legacy Caesars business by Eldorado (closed July 2020), we estimate Caesars holds more than a 10% revenue share of the domestic casino gaming market. The acquisition roughly doubled the company’s U.S. portfolio to about 50 properties while lifting its loyalty membership to over 60 million from 55 million (loyalty stood at 65 million at the end of 2021). Caesars has realized over $1 billion in combined sales and cost synergies from its merger with Eldorado, representing around a 30% increase to pro forma 2019 EBITDAR. Before this recent combination, legacy Eldorado successfully integrated the Isle and Tropicana acquisitions in 2017 and 2018, respectively, with both deals driving about a 30% return on investment, based on our calculation.

As a result of the acquisition of the legacy Caesars business by Eldorado (closed July 2020), we estimate Caesars holds more than a 10% revenue share of the domestic casino gaming market; this represents around 100% of the company's total EBITDA. The acquisition roughly doubled the company’s U.S. portfolio to around 50 properties while lifting its loyalty membership to over 60 million from 55 million (loyalty stood at 65 million at the end of 2021). Caesars has realized over $1 billion in combined revenue and cost synergies from its merger with Eldorado, representing around a 30% increase to pro forma 2019 EBITDAR. Before this recent combination, legacy Eldorado successfully integrated the Isle and Tropicana acquisitions in 2017 and 2018, respectively, with both deals driving about a 30% return on investment, based on our calculation.