Caesars Price Target Lowered on Limited F1 Impact

Posted on: January 17, 2024, 02:28h. 

Last updated on: January 17, 2024, 03:37h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

CBRE analyst John DeCree pared his price target on Caesars Entertainment (NASDAQ: CZR), citing negative impact from the recent labor negotiations with the Culinary Union and limited benefit provided to the operator from November’s Las Vegas Grand Prix.

Caesars Debt
Caesars Palace on the Las Vegas Strip. An analyst lowered his price target on Caesars’ stock. (Image: Getty Images)

In a new report to clients, DeCree revealed a $67 price forecast on the casino stock, down from $72. That new estimate implies upside of 52.2% from current levels and arrived as the stock has struggled to start 2024. Shares of Caesars are off 4.15% over the past week and down 6.44% year to date.

While the November Formula One (F1) race paid dividends for some casino resorts on the Las Vegas Strip, the positive impact for Caesars was likely confined to Caesars Palace.

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,” DeCree wrote.

Translation: Many high rollers who traveled to Las Vegas for the race likely didn’t visit Caesars’ properties such as Flamingo, Harrah’s, and the Horseshoe. Aria, Bellagio, and Cosmopolitan are operated by MGM Resorts International (NYSE: MGM).

Analyst Pares Caesars Cash Flow Estimate

Stemming from the above factors, DeCree also reduced his fourth-quarter cash flow estimate on Caesars to $945 million from $991 million. Of that reduction, $30 million is attributable to the Las Vegas Strip and the Atlantic City, NJ Boardwalk, where Caesars’ trio of casino hotels struggle to keep pace with market leaders Borgata, Hard Rock Atlantic City, and Ocean Casino Resort.

Another $15 million of that cash flow estimate reduction was attributable to Caesars Digital, with DeCree citing lucky results for sports bettors in the fourth quarter. Analysts have pointed to a similar trend potentially hindering results for other sportsbook operators.

DeCree expects Caesars will generate a cash flow of $3.9 billion this year, slightly below the consensus forecast of $4 billion. He added that Caesars Digital could recognize some benefits with revenue slated to grow 27%, and as the operator halts some costly marketing partnerships, which could generate savings.

Caesars Bonds Could Hold Clues

While Caesars stock has struggled to start 2024, the company’s debt could hold positive clues for investors. As noted by DeCree, the operator’s oldest debt recently sported yields of 9% but has since declined to 6.5%. Bond yields decline as prices rise.

The dislocation between how credit and equity markets value the company has widened, creating a compelling buying opportunity for the equity,” observed DeCree. “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.”

Caesars is widely viewed as one of the more compelling deleveraging stories in the industry. At the end of the third quarter, the company had $12.29 billion in outstanding liabilities, well below the total seen in mid-2020 when Eldorado Resorts finalized its acquisition of “old Caesars.” It’s expected the operator will slash debt by at least $1 billion this year.