Caesars Entertainment, Inc. (CZR): A Bull Case Theory

We came across a bullish thesis on Caesars Entertainment, Inc. (CZR) on The Value Bandit’s Substack by The Value Bandit. In this article we will summarize the bulls’ thesis on CZR. Caesars Entertainment, Inc. (CZR) share was trading at $41.58 as of Sept 19th.

Image Courtesy of Caesars

Caesars Entertainment has experienced a notable decline in its share price this year, despite maintaining stable operational performance. This downturn has attracted the interest of prominent investor Carl Icahn, suggesting potential confidence in the company’s future returns. As Caesars focuses on reducing its debt, shareholders stand to benefit from buybacks, earnings growth, and multiple expansions, especially in its burgeoning digital segment.

The company traces its roots back to Eldorado Resorts, founded in 1973. After going public in 2014, Eldorado expanded through strategic acquisitions, including Tropicana Resorts in 2018. The pivotal moment came in 2019 when Eldorado acquired Caesars for $7.2 billion, gaining access to a robust loyalty program and a diverse array of casinos, particularly in Las Vegas. Following this merger, Tom Reeg, formerly CFO of Eldorado, took the helm as CEO.

Caesars faces challenges with a highly leveraged balance sheet, which has led to market aversion, particularly amidst concerns about a weakening consumer environment. However, perceptions of its debt may be inflated due to the inclusion of lease liabilities. Notably, these rent agreements often adjust based on the Consumer Price Index and revenue performance, providing a buffer against financial strains. The company also owns significant real estate and is exploring the monetization of non-core assets to further reduce leverage.

The regional segment contributes about 45% of total EBITDA, benefitting from a strong rewards program that drives traffic to its Las Vegas properties, which maintain high margins due to a growing influx of tourists. Meanwhile, the digital segment has turned profitable, transitioning from losses to meaningful EBITDA contributions through improved marketing strategies and the introduction of same-game parlay betting. This segment could be valued at over $4.3 billion based on market multiples, positioning it competitively.

Valuation insights suggest a conservative approach using adjusted EBITDA minus stock-based compensation and maintenance capex. Currently, the company trades at a forward free cash flow multiple of 8.15x, significantly lower than the consumer discretionary median of 12-16x. Should the multiple converge to 12x, the stock price could rise to approximately $80 per share, indicating a potential gain of 108%.

In conclusion, Caesars Entertainment presents a compelling investment opportunity as it leverages digital growth and effectively manages debt. With its current valuation appearing conservative, substantial shareholder returns could materialize as operational performance stabilizes and debt levels decrease.

Caesars Entertainment, Inc. is also not on our list of the 31 Most Popular Stocks Among Hedge Funds. As per our database, 54 hedge fund portfolios held CZR at the end of the second quarter which was 57 in the previous quarter. While we acknowledge the risk and potential of CZR as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is more promising than CZR but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.

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Disclosure: None. This article was originally published at Insider Monkey.