It’s up more than 37 percent year-to-date and currently residing around $105, but Caesars Entertainment (NASDAQ:CZR) stock — one of Wall Street’s most favored gaming names — is deeply discounted relative to its potential upside, according to one analyst.
In a note to clients today, B. Riley analyst David Bain initiates coverage of the Caesars Palace operator with a “buy” rating and $191 price target. That implies upside of about 87 percent from the Nov. 11 close. The analyst’s call has Caesars higher by three percent in midday trading. Bain arrives at the $191 projection by breaking down the estimated per share value of the operator’s marquee businesses.
Our base-case valuation combines $143 per share for CZR’s Las Vegas and regional brick-and-mortar casino businesses, $41 per share for the digital casino business, and $7 per share for its managed casino business,” he said.
The managed casino business includes running tribal casinos under the Harrah’s brand in Arizona, California and North Carolina.
Caesars Stock Has Plenty of Catalysts for More Upside
As Bain notes, the $191 projection is a base case, meaning there are more avenues for upside in the already high-flying gaming stock.
The B. Riley analyst outlines scenarios that could combine to tack on another $49 to that price outlook. For example, $24 of equity value could be created by incremental improvements in cash flow and reduced interest expenses, the latter of which will happen with proceeds from the sale of William Hill’s international assets. Should Las Vegas convention business and international travel return to pre-coronavirus pandemic levels, that could be worth another $12 to Caesars stock, says Bain.
Additionally, the operator’s Cordish Companies/Pompano partnership could be worth as much as $8 a share, the sale of Las Vegas Strip asset could add $3 in value per share and a a potential Linq Promenade sale could be worth $2 a share.
Earlier this month, Caesars said it’s eyeing the sale of a Strip venue in early 2022.
Undeniably Strong Margin Story
One of the primary themes the investment community is monitoring in the gaming industry in the wake of the coronavirus pandemic is margin expansion at operators with deep Las Vegas and regional portfolios — something Caesars has.
Renewed focus on margins is a plus for Caesars investors because CEO Tom Reeg and his team developed a reputation for robust margin expansion while running Eldorado Resorts — the company that acquired Caesars last year. Data confirm they’re repeating that feat at “new Caesars.”
“CZR’s Las Vegas Strip 3Q21 EBITDA margins were ~1,000 bps better than the second best in its peer group and over 1,200 higher than the peer average. 3Q21 regional property margins were ~120 bps higher than the peer average,” said Bain.
Margin management is also relevant to Caesars’ fast-growing internet gaming business because the operator is leveraging its extensive database of land-based rewards club members, driving online customer acquisition costs while bolstering online and offline player loyalty.
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