Value Investor Daily #33

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Caesars Entertainment (NASDAQ: CZR) has experienced a substantial 70% decline in its stock price since October 2021 highs.

Currently, the stock trades at a P/E ratio of just 10.05, leading some investors to consider whether this is a prime buying opportunity, especially with Carl Icahn's recent investment.

Company Profile

Caesars Entertainment is the largest casino entertainment enterprise in the United States and one of the most diversified globally. The company operates in 18 states and offers slot machines, video lottery terminals, e-tables, hotel rooms, and various table games.

Additionally, Caesars is active in retail and online sports wagering across 31 North American jurisdictions and operates iGaming in five.

Challenges

Since 2020, Caesars has grappled with a hefty long-term debt, severely impacting its balance sheet and financial flexibility.

Over the past few years, the company's operating cash flow has not been sufficient to cover interest expenses, raising concerns about its resilience during economic downturns. In such scenarios, the substantial debt load could force asset sales, bond defaults or exchanges, and dilution of equity.

This high debt level has constrained Caesars’ ability to prioritize growth, unlike competitors such as Wynn Resorts and MGM, which are expanding internationally, and digital-focused companies like Flutter and DraftKings benefiting from the growing online betting market.

Carl Icahn’s Stake

A positive development for Caesars is the recent disclosure that billionaire investor Carl Icahn has taken a stake in the company, causing a 11% surge in the stock price on Friday. Icahn, known for his impactful roles in corporate restructurings, has stated he does not intend to push for changes at Caesars this time.

Icahn's previous involvement with Caesars was notable. In 2019, he advocated for the sale of Caesars, leading to the merger with Eldorado Resorts for around $8.5 billion in cash and stock.

Post-merger, the company retained the Caesars name to capitalize on its strong global brand. In 2020, Icahn disclosed in a filing that he had sold his stake in the company. 

Icahn’s new investment shows his confidence in Caesars' potential, even though he has no plans for active intervention.

Recent Results

The company’s latest quarterly results, released in April, were somewhat erratic due to their one-time nature. However, we believe that improved performance is likely for the remainder of the year. 

Two significant concerns for investors—digital business profitability and high leverage—have impacted the stock.

However, we believe there is a clear path to addressing these issues, with the digital business starting to achieve positive EBITDA and a plan for the company to significantly reduce leverage through free cash flow.

Long-term debt is down from a peak of $14.1 billion in 2020 to $12.1 billion now.

Valuation and Analyst Perspective

By applying various valuation models, including EV/EBIT multiples, P/E multiples, price/sales multiples, and DCF analyses, Caesars’ fair value is estimated at $42.68, suggesting a potential 20% increase from the current stock price. 

Analysts are also positive about the stock, with price targets ranging from $43 to $70, and an average of $55.61, indicating a possible 56.38% upside from current levels. 

Conclusion

Despite the significant decline in stock price and the challenging debt situation, Caesars Entertainment remains a key player in the casino and entertainment industry.

Carl Icahn's recent investment signals a strong belief in the company’s potential. 

The estimated fair value and analysts' price targets suggest considerable upside potential, making Caesars an intriguing prospect for investors.

While caution is necessary due to the substantial debt and competitive market, the potential rewards could be substantial for those willing to invest in Caesars Entertainment.

As always, do your own research and decide. Thank you for reading today!

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