Caesars Stars Among Consumer Cyclical Stocks, Says Morningstar

Stock is battered and weak Q2 Las Vegas data isn’t helping
On the bright side, analysts view Caesars stock as deeply undervalued, implying significant room for upside

Caesars Entertainment (NASDAQ: CZR) has recently faced challenges, trading lower after reporting mixed results for the second quarter in its key Las Vegas segment. However, some analysts remain optimistic about the company’s future, citing its undervalued stock as a significant opportunity.

casino REIT — Tourists near the Paris on the Las Vegas Strip. A research firm says operator Caesars is a deeply undervalued stock. (Image: *Bloomberg*)

The prevailing view among some financial analysts is that Caesars stock is undervalued, perhaps significantly. This assessment comes alongside the company’s strengthening interactive business sector. Notably, approximately fifty percent of Caesars’ earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) come from the bustling Las Vegas Strip.

The company expanded its reach in 2020 through the acquisition of the “old Caesars” by Eldorado Resorts. This strategic move not only enhanced its regional portfolio but also contributed to a notable increase in revenue and the ongoing payment of dividends. Analysts attribute a portion of this undervaluation thesis to the synergies realized from this merger.

“The Eldorado acquisition in 2020 roughly doubled the company’s US portfolio to about 50 properties while lifting its loyalty membership to over 60 million from 55 million,” states Morningstar analyst Dan Wasiolek. “Caesars has realised over $1 billion in combined sales and cost synergies from its July 2020 merger with Eldorado, representing around a 30% increase to pro forma 2019 EBITDAR.”

Morningstar included Caesars in a select group of the top twelve consumer discretionary stocks to consider, positioning it as the only gaming entity on the list.

Caesars Stock Has the Look of a Value Bet

For investors considering Caesars stock as a potential value play, Morningstar’s analysis reveals promising insights. The firm estimates that shares are undervalued by about 52%, positing a fair value estimate of $62, which is significantly higher than the current market price.

The path forward for investors revolves around how the gaming giant can enhance its value. Currently, Caesars has a net debt of around $11.2 billion, with ongoing debt-cutting measures reported. Speculation surrounds potential asset sales, though the operator hasn’t executed any this year, suggesting that the present economic climate may not favour gaming consolidations.

Interestingly, the operator employed funds from the 2024 sale of the World Series of Poker (WSOP) to reduce interest expenses by $40 million. However, the Federal Reserve did not provide a much-anticipated rate cut in July. Analysts suggest that every percentage point that the Fed reduces interest rates correlates to approximately $60 million in savings for Caesars annually.

Additionally, the value proposition is intertwined with interest rates; if potential buyers of some of the company’s assets are reliant on financing, they may delay purchases until rates improve. This situation effectively postpones Caesars’ capacity to sell non-core assets, which could otherwise bolster its cash reserves and assist in debt alleviation.

Caesars Digital Adds to the Value Narrative

On an encouraging note, Caesars’ online operations, including its prominent internet sportsbook, have just reported one of the strongest quarters on record.

“Caesars’ 2024 digital revenue is projected to grow by 20%, with an impressive EBITDA margin of 10%. This places the company in a strong position within the U.S. online gaming market, projected to exceed $50 billion by 2028, up from $22 billion in 2024,” asserts Wasiolek. “Despite stiff competition from platforms like ESPN Bet, DraftKings, and FanDuel, we anticipate that 18% of Caesars’ total sales will stem from online gaming by 2028.”

The investment community is awaiting developments on whether Caesars’ rising revenue and profit margins in its digital sector will prompt management to consider a spin-off of that entity—an ongoing topic of discussion within investment forums. Still, there is a shared belief that the current share price does not reflect the strides the company has made in this area.

To sum up, while Caesars may be grappling with certain challenges in the traditional casino market, its digital ventures and overall strategic positioning present significant opportunities for investors. Understanding these dynamics will be crucial for those seeking to gain insight into the company’s potential upside.