Caesars: 4Q Earnings And FY Totals Point To A Happy Ides Of March

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“Experience is nan coach of each things….” - Julius Caesar

As ever erstwhile making calls connected Caesars Entertainment, Inc. (NASDAQ:CZR) shares, I invoke my position of nan way of guidance coming from my years successful nan c-suite of that institution backmost successful nan day. The translator from nan firm civilization erstwhile I was portion of nan group that created it has been dramatic. I americium successful touch pinch galore friends, associates, and group I mentored to enactment tuned successful arsenic it were to nan company’s shifts successful really they scheme and execute their goals.

To statesman with, I statement that my past analysis of CZR for Seeking Alpha was published connected July 2 2022. The value astatine publication was $42.65, my guidance was beardown buy. Since then, nan banal has wobbled and thrusted pinch nan caput and tail winds of nan U.S. gaming market. At this penning it trades astatine $53.89. It spiked past week connected nan merchandise of its 4Q22 4th positive its FY totals by 3.5%.

Data by YCharts

Above: The banal has much tally room now that we are astatine nan early but robust betterment rhythm of nan post-covid era for Vegas and U.S. gaming successful general.

Caesars Entertainment, Inc. successful 2022 showed a nett nonaccomplishment ($899m) vs. ($1b successful 2021). This is 1 portion of nan investor script that continues arsenic a concern, particularly if we deed a recession sometime successful nan 2nd half of this twelvemonth and moreover though losses person gone down. Bear successful mind we are still astatine nan early stages of nan post-covid era. The Strip is patient again, and nan location business is holding its own. Also cardinal present is that while CZR’s sports betting portion had revenues ~$600m for 2022 connected grip of $12.8b, its clasp was beneath a normalized 7% astatine 5.4%.

This was undoubtedly owed to nan mostly higher mean number of sharps successful nan CZR customer base. Its 4Q integer business shaved losses considerably and management’s guidance of turning integer profitable this twelvemonth should deed its target. CZR was among nan first of nan 14 sports betting platforms to slam nan brakes connected trading walk for caller customer acquisition.

No awesome legalizations are expected to spell unrecorded this year, truthful each 30 sports betting markets will beryllium operating against existing integrated maturation successful nan sector. We are forecasting that CZR’s integer revenues will emergence supra $1b for 2023, keeping it wrong nan apical tier of operators pinch leader FanDuel (OTCPK:PDYPY), DraftKings (DKNY) and BetMGM(MGM). Its expertise to clasp aliases summation stock is related to galore factors. Its unrecorded casino sports books successful nan states wherever ineligible and wherever it inherited nan William Hill customers erstwhile it bought nan institution successful nan outpouring of 2021.

While this study looks astatine nan caller humanities translator of nan company, I worked for done galore slings and galore arrows of outrageous fortune, I deliberation a flashback from nan caller past is successful order.

I americium boosting my PT connected CZR to $78 by 2Q23.

Caesars corp.

Above: CZR's nationalist surface science of 50 properties gives it an expertise to negociate done headwinds and use from tailwinds from a wide geography.

For context, a little history follows and nan rationale for my bull script for my alma mater. It hangs connected nan premise that nan past is prologue, arsenic uttered by Antonio successful Shakespeare’s The Tempest. That intends what was is ever an echo of what is. And a succession of storms is precisely what nan institution has endured since 2008 to scope what I judge is nan takeoff constituent now for a $78 banal by nan extremity of IQ23.

2008: Caesars is bought by backstage equity operators Apollo Global and TPG for $31b paying a 31% premium. At nan time, CZR was nan nation’s biggest casino usability without an Asian presence. It was a bad woody connected galore levels, but a happy clip for CEO Gary Loveman, who sewage a immense haul. The woody closed successful nan teeth of nan 2007/9 financial crisis. Las Vegas gaming will had sunk complete 10% during nan recession that followed nan owe crisis.

The TPG guys publically admitted that nan CZR transaction had proven to beryllium “a bad deal.” Private equity brought thing to nan array but much complications to guidance and bad plus allocation decisions. My erstwhile associates successful nan company, almost to a person, complained that CZR was successful problem and precocious guidance nee backstage equity did not look to person a solution.

2015: The inevitable operation of monolithic indebtedness incurred by nan backstage equity deal, nan financial situation and a guidance group filling aged vino solutions into caller bottles triggered an $18b bankruptcy pinch nan institution $24b successful debt.

Second tier statement holders successful hedge costs battled a projected colony that kept first tier holders whole, and dumped astir of nan haircut connected them. After a prolonged ineligible war, wherever accusations of forbidden plus transfers abounded, an appointed maestro held for nan hedge funds, forcing nan bankruptcy woody to importantly amended their recovery.

2017: After nan alloy cage conflict royal pinch nan hedgie noteholders, Caesars Entertainment, Inc. emerged from nan bankruptcy. CEO Loveman took nan money and ran. He was replaced by a erstwhile Hertz executive whose superior task was to beryllium a steward who knew zilch astir gaming, but was a costs cutter.

2020: Eagle-eyed Carl Icahn, who complete his profession has cleaned up connected nan blunders of respective gaming operators, knew a bargain erstwhile he saw it. Early that year, he bought 20.88% of nan institution (~21m shares), averaging astir $8.45 to $9. He quickly joined nan board, dismissed nan placeholder CEO, and installed gaming pro Anthony Rodio to caput nan company. Rodio instantly returned cardinal determination making to spot heads by eliminating galore firm oversight mandates.

Icahn’s agelong position of nan casino business is that it is specified a mathematically pristine business that only mismanagement tin screw up its inherent profitability. And each clip he’s acted connected that strategy, he has taken billions of dollars disconnected nan table. His CZR move intelligibly met that standard.

Mid-July 2020: Icahn had been searching astir for a merger for CZR. Tom Reeg, CEO, of highly profitable location gaming usability El Dorado Resorts, stepped up to nan sheet and was first to laic money connected nan table. Despite overmuch skepticism from galore analysts astir nan upland of indebtedness incurred, Reeg and Icahn went ahead. El Dorado bought CZR for $17.3bm of which $7,2b was successful rate and nan equilibrium successful CZR shares.

Since past ,Reeg and his squad person narrowed attraction connected 5 cardinal areas: negociate done nan covid crisis, sphere and build connected coagulated Las Vegas beingness anchored by Caesars Palace, attraction its 55m Caesars Rewards database connected its astir weighted repetition customers, motorboat Caesars Sportsbook and attain marketplace stock activity among nan apical platforms successful nan space. Atop nan must-do list, escalate arsenic feasible nan simplification of nan company’s $24.4b successful semipermanent indebtedness speedier than ever.

2023 and beyond

Several cardinal issues were clarified by nan 4Q22 net call. Primary among them was nan long-awaited news by investors of a waste of a CZR Vegas portion property. The presumed strategy was to use astir if not each of nan proceeds of specified a waste to indebtedness reduction. (CZR has 4.5X leverage aft $200m successful salary downs past twelvemonth and is aiming astatine 4X aliases little for this year.) It shows rate and equivalents connected manus (mrq) of $1.0b positive $2.2b successful disposable revolvers. Its adjacent maturity decisions are 2.5 years away.

The ongoing $4.5b information of indebtedness has now been refinanced astatine a fixed complaint of 7%. Nobody tin conflict nan Fed, for sure, truthful immoderate happens to rates going guardant is anyone’s guess. One certainty is that it is highly apt that nan era of free money is gone and that Powell is acold from vanished raising rates. We deliberation 7% astatine this juncture is simply a prudent guardant conjecture by CZR.

Among nan properties that appeared to beryllium candidates for waste were two: The Rio, disconnected nan strip, and nan dowager of nan celebrated 4 corners of nan strip, nan bequest Flamingo. The Rio realty was sold successful 2019 to Dreamscape, an finance firm. CZR will tally nan spot until Dreamscape takes connected guidance arsenic well, already successful motion.

Caesars corp.

Above: The Flamingo astatine nan 4 corners, nan azygous champion chunk of realty connected nan Las Vegas portion began pinch Mr. B. Siegel successful 1946 and became Barron Hilton's pridefulness and joyousness money instrumentality by nan 1980s.

The Rio had been a reliable tiger to tame each these years owed to its off-the-strip location. But anterior managements kept nan spot going connected its celebrated buffet targeting locals, its charismatic pricing, and its stock of nan normal and gathering business, which has been cardinal to Vegas maturation for a decade aliases more. That was an easy layup. The Flamingo presented a tougher decision.

The Flamingo, connected nan different hand, has been a semipermanent rate cow. When it was owned by Hilton, Baron Hilton himself erstwhile told maine it was his proudest success. The spot was a basal value leader pinch a ace location. Its slot business was nan envy of nan full town. And it was capable to provender disconnected nan Southern California play package woody marketplace for decades. But arsenic nan saying goes, the aged bid changeth.

Hence, nan determination to clasp nan property. CZR will put $850m, to bring nan 3,400 room edifice into today’s customer mindset. In a broader context, we person seen really description continues successful Vegas pinch nan presence of nan mammoth Resorts World spot bringing 3,500 rooms to nan portion successful 2021. Add to that nan $3.7b Fountainbleu scheduled to unfastened precocious this twelvemonth pinch 3,700 much rooms. Furthermore, location are nan pending plans of billionaire Tillman Fertitta for different awesome portion resort. So, nan clear conclusion of CZR was nan correct one.

The determination facing Caesars Entertainment, Inc. was to ponder trading it, losing nan rate flow, yet knowing that a purchaser would move money into a renovation. Though nan portion surface science arsenic it were has moved to a spread-out, somewhat blurred “center,” nan Flamingo is axenic realty golden wherever it sits. So nan determination came down this way: Instead of trading nan property, why not do what immoderate purchaser would do and update it yourself? What could nan Flamingo beryllium if it were updated to entreaty to today’s Vegas visitant pinch tons much 21 st period bells and whistles?

Given nan costs of a ground-up improvement to beryllium connected a leftover portion location arsenic it were, that could easy costs betwixt $3b and $4b, nan sensible move was to put $850m successful nan Flamingo alternatively than waste it. And connected nan different broadside of that redo, you person an operating spot churning tons of rate that would person costs 4X arsenic overmuch to build from scratch.

The Flamingo will not beryllium closed during nan reno process.

Though nan anticipation of a recession deed looms ahead, I judge Caesars Entertainment, Inc. guidance has demonstrated its resiliency and attraction that will drawback tailwinds I expect to beryllium up successful 2023.

Our Price Target connected CZR is fundamentally a guidance story. It is simply a institution that has weathered a bid of mishaps, firestorms and guidance blunders beyond measurement for nan past 14 years. Yet it has emerged from nan aggregate messes and its guidance appears to beryllium successful bully power of its destiny going forward. It is committed to improving its indebtedness profile, it has participated successful nan betterment of Las Vegas, holding its ain successful nan regions and moving toward maintaining its stock of nan sports betting activity group.

Alphaspread’s look of discounted rate travel ("DCF") values Caesars Entertainment, Inc. astatine $63 a share, aliases ~14% undervalued. Analyst statement forecast for EPS is astatine $0.93 for this year. Our calculations foresee improving capacity of CZR location properties successful areas little apt to beryllium impacted by recession—if location is one. It besides considers nan ramping cognition of its caller Danville, Virginia temp casino. Based connected our intelligence web discussions pinch manufacture associates, each expect Las Vegas portion betterment to proceed and moreover hit this grounds year, pinch a building return of gathering and normal business positive sustaining pent-up request business facing down recession to a reasonable degree.

We are looking astatine 2023 for Caesars Entertainment, Inc. to nutrient EPS of $2.30 a stock if a recession is simply a comparative soft landing. If not, we proceed to spot an net scope of $1.45 to $1.55 EPS based connected nan supra scenario.