Caesars Entertainment’s management will host a series of meetings with the investment community in Las Vegas next week during the Global Gaming Expo, and Deutsche Bank continues to give the operator a Buy rating.
After falling to a 52-week low in June at $31.74 a share from a 52-week high of $50.51, Caesars stock closed at $42.95 on Wednesday.
“While we don’t believe the fundamental story has changed meaningfully, we continue to like Caesars,” Deutsche Bank analyst Carlo Santatrelli said in a note to investors.
For reasons, Santarelli cited a potential asset sale in Las Vegas, the commencement of buyback activity in the third quarter and expectations for the fourth quarter, given the current cadence in regional markets and some unfavorable Las Vegas Strip data points “that we believe are low enough.”
Santarelli also mentioned “drivers of differentiation and outperformance” relative to peers in regional markets in 2025. Digital performance is also better than expected and there’s still inexpensive valuation.
Deutsche Bank’s price target of $58 is unchanged.
In the third quarter, Caesars announced the sale of the World Series of Poker brand for $500 million; those proceeds aren’t reflected in the current model, Santarelli said. The cash flow from the WSOP brand was about $25.5 million.
“This sale marked the first in what we believe will be a series of catalysts for Caesars with its repurchase of about $140 million of stock in the third quarter,” Santarelli said. “Still on the horizon is the Las Vegas retail/real estate sale, which we believe is another equity-value-creating transaction, given a sale multiple likely to be well north of the trading multiple at present. We believe the timing of the transaction remains a question for investors, though our sense is that discussions are active.”
Strip gaming trends have been and will likely continue to be choppy, due primarily to the high-end comparison stack, Santarelli said. He also noted that revenue-per-room trends lately have been uneven, with investor concerns around fourth-quarter demand.
“Based on our checks, we believe Caesars is better off on a relative basis for the fourth quarter, due in part to its limited fourth-quarter 2023 F 1 benefit, a healthy group position, and limited reliance on FIT travel,” Santarelli said. “As such, management is well positioned to address these concerns when meeting with investors next week.”
While Deutsche has trimmed their MGM Resorts Strip forecasts for both the third and fourth quarters, they’ve also shaved their third-quarter Strip forecast for Caesars ($473 million property EBITDAR from $484 million). The fourth-quarter forecast is unchanged.
On the second-quarter earnings call, management noted that the level of decline in the third quarter would resemble that of the second quarter (property EBITDAR down 8%), while also expecting the fourth quarter regional segment to grow year over year with some relief from the New Orleans tax on gaming revenue.
“We note that our segment EBITDAR forecasts call for an 11% year-over-year decline in the third quarter versus our prior forecast of a 9% decline; a 4% fourth-quarter year-over-year decline is unchanged,” Santarelli said. “While broader regional trends were not great, the bulk of our revision stems from the New Orleans construction disruption being worse than expected, weather events in the Southeast, and the continued negative impact of group comparisons in Reno.”
Due to an unfavorable calendar in September, Santarelli expects monthly state gaming revenue results to remain soft. Same-store gaming revenue is likely to be down about 5.5% year over year and down 12.8% relative to the third quarter of 2019.
By month, same-store gaming revenue in July was down 13.4% year over year, while August bounced back, with same-store results up 80 basis points year over year. He expects September to be challenging, given two less weekend days and challenging weather events.
“While competition and same-store weakness could well continue into 2025, we believe Caesars’s regional pipeline should serve as a bit of a differentiating and beneficial factor relative to regional peers,” Santarelli said. The Caesars pipeline primarily consists of three meaningful projects, each of which will favorably impact 2025.
The permanent facility in Columbus, Ohio, opened on May 17 and was cash-flow positive in the second-quarter stub period. The new facility has a 17,000-square-foot casino with 400 slot machines, 11 table games, and a sports book.
“The impact of the permanent facility has been evident in gaming-revenue results, with July and August up about 67% year-over-year,” Santarelli said. “We’re assuming about 45% gaming revenue growth for Columbus in 2025.”
The 340-room $435 million Caesars New Orleans hotel tower remains on track to open on Oct. 17. The project also includes casino renovations and new restaurants. Deutsche Bank is assuming about 10% gaming revenue growth at Caesars New Orleans in 2025.
Caesars Danville in Virginia remains on track to open in December. The permanent facility will double capacity, which is notable, since the temporary facility has the highest win per unit in the Caesars network.
“We would note that the permanent facility is likely to be dilutive to margins, but additive to EBITDAR,” Santarelli said. “We’re assuming about 20% year over year gaming revenue growth for Danville in 2025.”
Through August, Caesars online sports betting was up modestly year over year with the entirety of the growth stemming from North Carolina, Maine, and Kentucky. Same-store online-sports-betting revenue is likely flat to slightly down, heading into September.
“Unlike peers, however, Caesars remains disciplined with promotions, as trackable promotions, relative to handle, stand at about 1.4% in the third quarter to date,” Santarelli said. “We note that this level of promotions, relative to handle, is over 100 basis points below that of peers.”
On the icasino side, the Caesars Palace online product continues to perform well, with casino gaming revenue up about 60% in the third quarter through August. The refreshed brand, as well as the Michigan launch of The Horseshoe-branded icasino, should allow Caesars to maintain its growth trajectory and market gains within the icasino vertical, Santarelli said.
“Third-quarter market share through August is up about 120 basis points from third-quarter levels,” Santarelli said. “Given the strength in the icasino segment, as well as the relatively stable online sports betting revenue despite industry low promotions, we have increased our segment EBITDA forecast for the third and fourth quarters. We continue to believe the digital segment remains detached from peer valuations, and we believe the cadence and trajectory in the segment will eventually trigger a valuation reset as investors view the $500 million EBITDA target more credibly over the coming quarters.”