A Wall Street analyst painted a rosy picture for Caesars Entertainment over the next 12 months, based on the Las Vegas Strip and its move toward profitability for digital gaming.
In his note to investors, David Katz of Jefferies Equities Research said that he met last week with Caesars CEO Tom Reeg and Senior Vice President Brian Agnew. He wrote that not only is there an “uber-strong set-up” for the Strip, but the regional business is expected to be “solid.”
Katz reiterated a buy of Caesars stock, even though the leverage profile “bears greater risk than some peers.” He said there continues to be a path to a considerable upside.
“The Las Vegas Strip remains the key profit and cash-flow driver of the business,” Katz wrote. “Management provided updates on the near-term Las Vegas set-up, which reflects strong occupancies in the 96% to 97% range, with visibility in the next 90 days suggesting continued strength.”
Caesars management noted that with occupancies at this level, room, food and beverage and entertainment profitability remains high. One distinct headwind is the expiration of the Culinary Union contract, which is likely to mitigate the otherwise higher profitability.
The Formula 1 race in Las Vegas in November and Super Bowl in February will provide earnings catalysts, which Katz said are “firmly bullish and supportive” of higher earnings.
As for the digital business, it’s poised for a reversal, Katz said. Caesars generated losses in 2021 and 2022 of $1.1 billion, but the ongoing indication is that the business can continue to gain share, notably in igaming, under new leadership. That would result in profitability in 2023 and a run-rate of $550 million in 2024, Katz said.
A key change to Jefferies’ digital forecast is the progression in 2023, with modest losses in the first half of the year pivoting in the second half. The total EBITDA for the year of $17 million is lower than the prior $36 million, due to the progression, Katz said.
The key drivers of the pivot are the launch of new apps during the third quarter, which provide separate but wallet-connected payment processing for online sports betting and igaming.
In addition, the progressive roll-off of unprofitable marketing partnerships from 2024 to 2026 “should provide a clear context for improved cost basis,” Katz said.
The analyst noted that the balance sheet is at the heart of value expansion. The winding down of necessary projects, such as the Lake Charles repositioning, the New Orleans renovations, the Danville, Va., development, and the mandatory Atlantic City improvements, is key to the financial pivot in the financial profile and therefore the stock.
According to Katz, Caesars has fine-tuned the timing and refinancing of the IN/Centaur asset deals with VICI Properties and the resulting rent/liability representations in their model with leverage at 5.5X in 2023 and 4.8X in 2024.
Caesars traded at $45.47 at the close of the market Monday. It’s up 7.6% so far in 2023, but down $23.11 or 33.7% in the past year.
As a base-case scenario, Katz predicts $64 for a 41% increase. In an upside scenario, the stock would trade at $110, a 143% increase. On the downside, if there’s a recession that’s worse than expected and margins fall to pre-COVID levels, the stock could trade at $25, or a 45% drop.