Caesars Gets Lift As Analysts Applaud Reduced Digital Spending

Time Stamp: February 23, 2022 5:31 PM

On a brutal day for domestic equities, Caesars Entertainment (NASDAQ:CZR) stood out in positive fashion, as investors seemingly cheered the company’s plan to significantly limit iGaming and online sports wagering expenditures.

Caesars
Caesars Palace Las Vegas. The stock rallied today as investors cheered less sports betting spending. (Image: Barron’s)

Shares of the casino operator finished higher by 2.76% on volume that was more than double the daily average, while the S&P 500 tumbled 1.84%. Caesars turned in a solid showing today against a challenging backdrop — one made worse by the fact that at least five analysts cut price targets on the casino operator’s shares.

However, analysts’ price outlooks for the shares still imply significant upside from current levels, indicating Wall Street is comfortable betting on Caesars’ management.

It’s simple, we remain overly bullish,” said Stifel analyst Steven Wieczynski in a note to clients. “Shares seem massively undervalued at current levels. This management team is like a hot craps table, and we see no reason why a seven is going to turn up anytime soon.”

He reiterates a “buy” rating on Caesars while trimming his price forecast to $120 from $138.

Investors Cheer Caesars Spending Cuts

In announcing fourth-quarter results after the close US markets Tuesday, Caesars said it’s significantly dialing back its traditional media spending for its online sports betting business.

While there will be some ads run in new markets and leading up to the NCAA Tournament, Caesars CEO Tom Reeg told analysts the company got to where it wants to be in terms of sports wagering market share more rapidly than expected. He added that it makes sense to pare related spending over the near-term.

The current quarter is likely to mark the worst of losses for Caesars Sportsbook, Reeg said, following the operator’s first full NFL season and launches in Louisiana and New York. Investors may be heartened by that news, particularly at a time when some operators continue bleeding cash in the hyper-competitive US sports wagering industry. Said differently, Caesars isn’t DraftKings (NASDAQ:DKNG), and these days, that’s a positive in the investment community.

“While we calculate, CZR’s stock price implies a negative digital value of well over $10B (or over $45 a share) versus ~+$9B of equity value for digital pure-play DKNG,” said B. Riley analyst David Bain. “While not to impugn DKNG, there are clear differences showcasing benefits of CZR’s omnichannel setup. CZRs called out ~$150M of new run-rate gaming revenue (70% flow-through) from digital patrons to its brick-and-mortar.”

He also rates Caesars a “buy” with a price target of $183, down from $191.

Caesars Non-Digital Outlook Bright

With investors recalibrating expectations across the board for digital gaming, Caesars offers a buffer in the form of its robust Las Vegas and regional casino portfolios.

“With impact from omicron fading into March, we expect investor focus to shift back to sequential growth drivers, where CZR remains arguably unparalleled,” adds Wieczynski. “For the LV Strip, the eventual return of the high-margin group and convention customer should see ~10 percent of potential upside to LV Strip estimates relative to the pre-omicron run-rate.”

Further adding to the Caesars investment thesis were management comments on a Tuesday call with analysts. They indicated the company already reached the $1 billion synergies promised when it was formed via the 2020 acquisition by Eldorado Resorts.

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