Caesars Stars Among Consumer Cyclical Stocks, Says Morningstar
After the casino giant revealed poor second-quarter earnings in its Las Vegas division, Caesars Entertainment (NASDAQ: CZR) saw a decline in trading on Wednesday. However, some experts are standing by the bruised stock.
The stock is undervalued, possibly significantly so, according to a large portion of that defense, especially when taking into consideration the company's growing interactive business strength. Caesars' short- to medium-term problem is that about half of its earnings before interest, taxes, depreciation, amortization, and restructuring or rent charges (EBITDAR) come from the Las Vegas Strip.
Eldorado Resorts' 2020 acquisition of "old Caesars" increased the operator's regional portfolio, which saw an increase in revenue in the second quarter and is still delivering dividends today, all while supporting the discounted thesis.
"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,” notes Morningstar analyst Dan Wasiolek. “Caesars has realized 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.”
Caesars is the only gaming brand to make the research firm's list of the top 12 consumer discretionary equities to think about.
Caesars Stock Seems Like a Good Investment
Morningstar has excellent news for those who are ready to bet that Caesars stock is a reliable value investment. With a fair value estimate of $62, which is more than double where the stock finished today, the research group claims that the shares are 52% undervalued.
How the gaming company adds value is the problem for investors. Caesars has a net debt of approximately $11.2 billion, and its debt reduction initiatives are well-recorded. Asset sales may be part of those ambitions, but the Harrah's operator hasn't sold anything this year, raising concerns that the macroeconomic climate isn't favorable for the consolidation of the gambling sector.
In relation to macro factors, the operator decreased interest costs by $40 million using proceeds from the 2024 World Series of Poker (WSOP) sale; however, the Federal Reserve did not comply by lowering interest rates in July. For every 100 basis points if the Fed lowers interest rates, Caesars would save $60 million annually, according to some calculations.
There is another connection between rates and Caesars' value offer. Potential buyers may put off purchases of some of the company's assets until interest rates decline if they require financing. This makes it more difficult for Caesars to sell off non-core businesses and raise money to further reduce its existing debts.
Caesars Digital Strengthens the Value Argument
Caesars' online operations, which include its own online sportsbook, are now enjoying one of their finest quarters ever.
“Caesars’ 2024 digital revenue growth of 20% and EBITDA margin of 10% show that the company is positioned to benefit in a US online gaming market that we see reaching more than $50 billion by 2028 from $22 billion in 2024,” adds Wasiolek. “Despite competition from ESPN Bet, DraftKings, FanDuel, MGM, Fanatics, and others, we forecast 18% of Caesars’ total sales will be generated from online gaming by 2028.”
The financial community generally feels that the operator's share price undervalues the advancements achieved in the interactive business, but it is unclear if Caesars Digital's growing revenue and profitability will encourage management to spin off that company.