Caesars Earnings: Vegas Remains Full and the Liquidity Profile Is Sound; Shares Undervalued

No-moat Caesars’ CZR 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.

Las Vegas properties remained full, with occupancy at 96.6% versus 93.6% a year ago. This helped push revenue up 4%, driven by hotel, food, and beverage, as casino sales were flat. Year-to-date sales were up 9% and we plan to lift our 5% 2023 forecast toward 6%, which implies around 2% growth in the fourth quarter. Meanwhile, EBITDA margins were 43% versus 44.6% last year, with year-to-date down 36 basis points, tracking near our 45.2% 2023 forecast (down 60 basis points from 2022). While we have been steadfast on travel demand resiliency since the summer of 2020, we expect Caesars’ Las Vegas sales growth to decelerate to 2% in 2024 (down from our 2%-3% prior forecast), driven by mounting headwinds, such as lasting inflation and depleted consumer savings. We also expect Vegas margins to temporarily drop next year despite an anticipated increase in group mix, weighed by an upcoming conclusion of a new union contract.

Investors have not discriminated with their recent distaste for companies with high debt, which presents an opportunity to own an Exemplary capital allocation firm like Caesars. Although Caesars has $4.4 billion of debt maturing in 2025 at around a 6% fixed rate, which will likely need to be refinanced at higher rates, it has a strong management team with a proven history of reducing debt. Also, it has nearly $3 billion in liquidity, and we estimate it will generate between $2.5 billion and $3 billion in cash flow to the firm on average during 2023-25, making debt concerns misguided, barring a severe and prolonged recession.