Caesars Earns Overweight Rating in New JPMorgan Coverage

Posted on: June 21, 2022, 10:35h. 

Last updated on: June 21, 2022, 11:50h.

Shares of Caesars Entertainment (NASDAQ:CZR) are enjoying a modest bounce today. That’s after JPMorgan analyst Joseph Greff restarts coverage of the casino operator with a bullish call.

Caesars’ Paris on the Las Vegas Strip. JPMorgan is bullish on the stock. (Image: Los Angeles Times)

In a note to clients, Greff reinstates the Horseshoe operator with an “overweight” rating and a $59 price target, which implies upside of approximately 50% from the June 17 close. The stock came into today’s trading session down 57.61% year-to-date.

We see upside of $20 to our $59 price target and downside of $10 to $27 in a hypothetical recession scenario whereby 2023 earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR)is 20% below our (below Consensus) estimates and ascribes modest target multiples in these up/downside scenarios,” Greff stated in the note.

As with other gaming equities, Caesars is slumping this year. The shares are sagging due to culprits such as inflation and margin concerns. On the bright side, margin concerns may be exaggerated, and Caesars may have some momentum on that front.

Catalysts for Caesars

The Las Vegas Strip, where Caesars is the second-largest operator behind MGM Resorts International (NYSE:MGM), is one of the primary catalysts for Caesars stock in the eyes of Greff.

“On the LV Strip (~50% of property level EBITDAR), growth should come from a group-related ramp, which likely comprises 20% of room nights going forward, ~500 bps higher mix than the past. Furthermore, we see CZR as more than just a same-store grower,” notes the JPMorgan analyst.

Another potential factor in Caesars’ favor is free cash flow. Some Wall Street analysts see the Harrah’s operator morphing into a free cash flow generating machine as it accelerates its pace of debt reduction, sells underperforming assets, and reins in spending.

Greff expects Caesars will see a reduction in construction and other one-time expenses in marquee markets such as Atlantic City, NJ, New Orleans, and Lake Charles, La. Expansion plans in Indiana could also be additive to the stock.

Another point in favor of Caesars is reduced spending on digital gaming, including online sports betting, which could lead to lower earnings before interest, taxes, depreciation and amortization (EBITDA) losses in that division.

Other Points of View

While JPMorgan is bullish on Caesars, the confluence of rising interest rates, soaring inflation, and recession speculation is taking a bite out of the broader complex of gaming equities.

A troubling macroeconomic environment is plaguing the consumer discretionary sector — where gaming stocks reside — and making it one of the worst-performing groups in the S&P 500 in 2022.

Additionally, Wells Fargo recently advised clients to avoid or sell short Caesars and Penn National Gaming (NASDAQ:PENN).