CBRE analyst John DeCree knocked $5 off his price target for Caesars Entertainment, lowering it to $67 per share in an investor note published yesterday. The move was prompted by Caesars’s recent revision of its fourth-quarter cash-flow projections.
DeCree blamed higher labor costs following a protracted Culinary Union negotiation for CBRE’s own revision of Caesars’s prospects. He also cited Formula One weekend, which provided the casino company with less upside than they previously modeled.
While Caesars Palace is thought to have benefited from business associated with the Las Vegas Grand Prix last November, the good news ended there. Wrote the DeCree, “The balance of the CZR portfolio in Las Vegas is more mid-tier and probably did not capture as much of the international baccarat volumes, favoring properties such as Bellagio, Aria, Cosmopolitan, and Wynn.” All of the aforementioned, save for Wynn Las Vegas, are operated by rival MGM Resorts International.
Prompted by these factors, DeCree shaved his fourth-quarter cash-flow projection from $991 million to $945 million. This included a $15 million haircut attributable to the Las Vegas Strip. Another $15 million in negative adjustments were chalked up to Atlantic City and Caesars’s regional casinos, described as “facing challenges.”
Still another $15 million markdown was based on the projections for Caesars Digital, with “fan-friendly sports results” to blame. Overall, however, DeCree penned, “If the fundamental outlook holds up, particularly in Las Vegas with convention expectations in 2024, our estimates could prove conservative.”
On balance, he stated, his analysis was “seeing the forest through the trees.” Over half of its price target represented upside, despite fears of a consumer-spending slowdown.
The primary drags on Caesars, continued DeCree’s report, were interest rates, particularly in light of the company’s leverage and debt maturities due next year. “That said, the recent improvement in base rates and CZR’s bond yields should outweigh the near-term estimate revisions for 4Q23.”
As an indicator, his report pointed to Caesars’s oldest bonds, which had been trading at nine percent, but were now down to 6.5 percent. “The dislocation between how credit and equity markets value the company has widened, creating a compelling buying opportunity for the equity,” DeCree wrote.
“Credit markets are viewing the company more favorably than just three months ago, likely due to lower base rates, but also the resilience of casino cash flows in the face of lingering inflation, inflecting profitability in digital, and ongoing debt paydown.”
Looking ahead, DeCree predicted 2024 cash flow of $3.9 billion, slightly lower than Wall Street’s consensus estimate of a fraction less than $4 billion. The new model presumed same-store downward movement both in the cash flows of regional casinos, as well as those of Las Vegas, “due to flattening or declining revenue trends.”
However, increased profitability from Caesars Digital was foreseen as an offsetting factor. Revenue was predicted to grow 27 percent, helped by the cessation of some less-profitable marketing relationships.
The modest declivity anticipated for regional casinos (four percent of cash flow) is expected to be halved by contributions from two new casinos, Caesars Virginia and, in Nebraska, Harrah’s Columbus. The former opened last May 15, while the Cornhusker State racino debuted June 12.
Very modest cash-fl0w growth of a half-percentage point for the Las Vegas properties was credited to one first-quarter event: the Super Bowl. The second and third quarters are expected to face tough comparisons, although the fourth quarter of 2024 should benefit from Formula One’s return, DeCree wrote.
