Analyst predicts higher Caesars Q2 earnings, citing Las Vegas and sports betting

June 20, 2023 6:36 PM

Analyst predicts higher Caesars Q2 earnings, citing Las Vegas and sports betting

Photo: Shutterstock
  • Buck Wargo, CDC Gaming Reports
June 20, 2023 6:36 PM
  • Buck Wargo, CDC Gaming Reports

Wall Street analyst David Katz issued a report to investors, in which he remained bullish on the second-quarter earnings of Caesars Entertainment, particularly with Las Vegas and sports betting, and reiterating a buy of the stock.

Katz, of Jefferies Equities Research, wrote that notwithstanding what he called “modest updates” to second-quarter estimates, Caesars “remains among the more potentially dynamic stories in our gaming coverage, with Las Vegas exposure, capital-investment growth, digital pivot to profitability, and leverage reduction.”

Katz expects the “progression of positive dynamics to continue” and is not reflected in the share prices at this time. The stock has been trading at just under $50 this week and Katz put a price target of $64, which includes $4 per share from sports betting.

After discussions with management and seeing industry trends, Jefferies has updated second-quarter revenue and EBITDAR figures, particularly in the Las Vegas and digital segments.

Regional adjusted gross revenue data from Las Vegas demonstrated a stronger performance over the first quarter than expected by reaching nearly 8%, Katz said. In addition, U.S. sports-betting handle and revenue for the first quarter have delivered 24% and 85% growth year over year, respectively. “We expect the noticeably positive momentum in both of those segments to carry over into the second quarter,” Katz wrote.

Jefferies forecast Caesars’s Las Vegas segment to generate $1.126 billion of revenue and $522.6 million of adjusted EBITDAR versus prior forecasts of $1.09 billion and $505 million.

Katz said they’re revising Caesars’s digital-segment revenue and EBITDAR to $255.2 million and a loss of $3.2 million from $258.5 million and a loss of $7.3 million.

Jefferies has updated its 2023 estimates to $11.507 billion of revenue and $3.881 billion of adjusted EBITDAR versus $11.461 billion and $3.861 billion previously.

Katz also issued a separate note to investors about the top stocks and themes investors are talking about and highlighted the company’s gaming conference this week. One deals with the Churchill Downs partnership with Urban One that announced on June 14 it has a casino- host agreement with the city of Richmond, Virginia. The partnership is expected to develop a $562 million gaming and entertainment facility, subject to local referendum and state certification.

Katz said they expect a temporary casino that will cost between $50 million and $90 million.

“Our impression is that the forthcoming referendum could have a higher probability of success this year, having narrowly failed in the past,” Katz wrote. “In short, the update supports our thesis that Churchill Downs is uniquely positioned for growth versus peers.”

Katz said the ongoing growth of the Kentucky Derby through modest capital spending and pricing remains the “highest value-accretive aspect of the story.” In addition, the development projects in Kentucky and Virginia support the ongoing growth in casinos, not only in its 2023-2024 estimates of $1.08 billion and $1.2 billion, but beyond those levels going forward.

The other item that got the attention of investors is DraftKings’s overbidding Fanatics to acquire the U.S. segment of PointsBet, Katz said. DraftKings’s bid of $195 million exceeds the $150 million offer accepted from Fanatics. Katz expects further bidding from Fanatics, which had been relying on the acquisition to jump-start its sports-betting capabilities in the U.S.

“We believe the announcement by DraftKings that it will acquire the PointsBet U.S. business is a modestly positive surprise for the shares,” Katz wrote. “The strategic and financial logic is clear from DraftKings’s perspective, although we consider the realistic possibility that the original bidder, Fanatics, could revisit with a higher bid. Finally, we believe the event supports our expectation for accelerating merger-and-acquisition activity in the sector, which is positive.”

Jefferies will be hosting its annual consumer conference this week on Nantucket island in Massachusetts, in which the key stocks and themes from its coverage should focus on digital gaming and trends in product evolution, market share, legalization prospects, and mergers and acquisitions.

Katz said they expect PENN Entertainment, Bally’s Corp., Caesars, Churchill Downs, Gaming and Leisure Properties, and VICI Properties to discuss underlying land-based trends. IGT, Light & Wonder and Everi will also be in attendance.