Caesars Entertainment Q1: Stronger Than A Year Ago (NASDAQ:CZR)

Caesars Entertainment, Inc. (NASDAQ:CZR) is a casino and gaming stock with a market cap of $9.62 billion. It recently released its Q1 2023 Earnings report, which saw double-digit revenue growth YoY due to tailwinds from increased sports betting, substantial group attendance numbers and its investment in the digital space. Over the last five years, CZR stock has rewarded investors with 6% returns.

Before the pandemic, Caesars made significant investments in group facilities, which did not yield significant returns until this quarter. Additionally, the company has seen growth in both its brick-and-mortar and digital entertainment segments. Management has been working to reduce debt levels, divesting unprofitable businesses, and invest in the growing online entertainment space to improve overall performance. With high profitability margins, double-digit growth, and positive free cash flow, investors may want to consider a bullish outlook on this established brand in the hospitality and gaming industry, which is experiencing an increasing number of in-person and online visitors.

Overview

Caesars is a prominent player in the gambling industry, with 51 properties across 16 states. They offer gaming and hospitality services and own, brand, lease, or manage a total of 52,100 e-tables, slot machines, video lottery terminals, 2,800 table games, and 47,200 hotel rooms. Furthermore, Caesars has heavily invested in the digital space through Caesars Sportsbook, Caesars Racebook and iGaming mobile apps. Their competitive advantage lies in their strong presence in the USA and worldwide brand recognition. The company has grown through significant acquisitions since 2005, including the recent £2.9 billion acquisition of William Hill PLC in 2021.

Caesars generates revenue through four segments: brick-and-mortar locations in Las Vegas and Regional, Caesars Digital sector (which includes retail and mobile sports betting, online casino, poker, and horse racing), Managed and Branded (which comes from properties and license rights for local and international brand use). Caesars had a strong Q1 2023 and expects continued success due to increased group attendance, sports betting tailwinds, and a digital expansion strategy.

Sports betting is a long-term tailwind in the gambling industry. It has been five years since the opening of the regulated sports betting market, which is now available in 36 states, with three more additions expected this year. Sports betting is on the rise, with operators collecting $7.6 billion in revenue in 2022 and forecasts indicating that this could reach $20 billion in 2023.

Furthermore, the number of group activities is growing, and Caesars is cashing in on these with the facilities it had invested in pre-Covid pandemic. Group attendance accounted for 21% of occupied rooms in the first quarter, related to group segment rooms, ADRs and banquet revenues, which are increasingly booked for the rest of the year. The management team expects a record year for its group business in 2023. Furthermore, the management believes its EBITDA could reach $5 billion by the end of 2025.

Q1 Earnings Highlights

Caesars had a solid start to FY 2023; its revenue increased by 24% YoY to $2.83 billion, net loss was reduced by 70% YoY to negative $136.0 million, and EPS improved to a loss of $0.63 per share compared to a loss of $2.11 per share in Q1 2022. We can see that across all segments, net revenue increased YoY, although there was a decrease in YoY revenue in Regional due to severe weather conditions impacting visitor numbers.

Looking at the earnings history per quarter, we can see that Caesars has beat expectations for EPS and revenue for the last five quarters.

Based on the latest trailing twelve months data, Caesars has a healthy levered free cash flow of $1.26 billion. However, the levered free cash flow in Q1 2023 turned negative due to a substantial debt payment, which amounted to a negative $114.9 million.

When examining the balance sheet, it becomes apparent that the company currently has a significant amount of outstanding debt. However, it’s worth noting that the company has been proactively reducing its debt by $1 billion annually over the past two years with the aim of continuing this trend into the future. As of March 31, 2023, the company’s net leverage, as calculated under its bank credit facility, was 4.2x.

Valuation

Analysts generally have a positive outlook towards Caesars, with an average target price of $70.33, which falls well below the current stock price. When compared to other gambling companies over a three-year period, holding onto CZR stock has proven to be more profitable with returns of 143.22%. However, in the past year, the stock has experienced a decline in value, losing 29.02%.

Based on Seeking Alpha’s Quant rating, the stock’s valuation is graded as C-. The price-to-book ratio of 2.67 may seem high, but it is lower than its competitors DKNG (11.15) and PDYPY (2.79). Additionally, the company boasts an impressive three-year CAGR of 68.84% and a gross profit margin of 53.74%. It is projected to achieve $5 billion in EBITDA by the end of 2025, making it an attractive investment opportunity. However, it is worth noting that the stock has not performed as well as the S&P 500 over the past year.

Risks

Caesars is categorised as a consumer discretionary stock, which may be affected by a recession. The company’s performance could suffer, especially since it has accumulated a considerable amount of debt from past acquisitions. If Caesars fails to pay off its debt maturities due to poor performance, it could pose a significant problem. Nonetheless, the company has been successful in reducing its debt intake in the past two years.

Final thoughts

Over the past quarter, Caesars’ financial performance has significantly improved compared to the previous year. The company is benefitting from its investments in group facilities and digital expansion, as well as an increase in visitors to its physical locations, particularly in Las Vegas. While it’s important to remain cautious about the economic market, there are promising signs of growth in sports betting demand predictions and group bookings. Additionally, management is committed to reducing its annual debt by $1 billion and has projected a potential EBITDA of $5 billion by the end of 2025. Given these factors, investors may want to consider a bullish stance on this company.