Caesars Deleveraging Story Poised for Dramatic Acceleration, Says Analyst

Caesars Entertainment’s (NASDAQ:CZR) debt burden stood at $13.5 billion at the end of March among the highest in the gaming industry but one analyst sees the company’s debt-reduction efforts potential accelerating over the near-term.

In a recent note to clients, Stifel analyst Steven Wieczynski said, “The potential expected sale of a Las Vegas Strip asset should dramatically accelerate an already considerable organic deleveraging story.”

Dating back to last year, Caesars management said it expected to unveil the sale of one of its Strip venues early in 2022. Since then, the only debates centered around when the operator would formally and which Las Vegas venue it would be.

Nearly halfway through the year, that announcement hasn’t arrived. Last month, reports surfaced the operator at a price tag of roughly $1 billion. There’s speculation that Caesars may have difficulty unloading that property because it needs enhancements, and business there might decline if it’s no longer part of the Caesars Rewards program.

Conversely, owing to comparisons on other recent Strip property sales, it’s possible Caesars could command a high teens multiple when it decides to part ways with one of its Sin City venues.

Wieczynski recently met with Caesars CEO Tom Reeg and other high-ranking executives. He notes they’re bullish on Strip and regional casinos, and that investors may be overlooking the company’s free cash flow (FCF)-generating potential.

We believe the market continues to discount the ‘post-COVID’ FCF potential of CZR’s brick mortar business, management’s iGaming/OSB opportunity (not even priced into shares anymore), the Omni-channel marketing potential embedded in Total Rewards, and potential for asset sales,” says the analyst.

Still, as is the case with other gaming equities, . The shares are off 51.35% year-to-date due to culprits such as inflation and margin concerns. On the bright side, it’s possible that margin concerns are exaggerated and Caesars may have some momentum on that front.

“Management firmly sees these concerns as overblown, highlighting that (1) the current trend in the savings rate could imply tailwinds to the consumer through 2023 and (2) their overall cost structure is predominately ‘right-sized’ by this point with any modest pockets of cost inflation likely offset by the return of the high margin group customer,” adds Wieczynski.

With Caesars stock off 62% from its 52-week high, and issues such as inflation, soaring gas prices, and rising interest rates factored into the share price, risk/reward may be skewing more towards “reward.”

“We believe shares have corrected to the point where investors need to revisit this story. Vegas and Regional trends continue to outpace expectations, and it seems like trends have only gotten better through May,” concludes Wieczynski.

He rates Caesars a “buy” with a $113 price target, implying it can more than double from the June 10 close of $45.50.