Caesars Digital Betting Biz Valuation Not Adequately Appreciated, Says Analyst
Posted on: February 9, 2022, 08:18h.
Last updated on: February 9, 2022, 09:14h.
Caesars Entertainment (NASDAQ:CZR) is a rising force in the internet casino and online sports betting industries. But an analyst argues the current share price implies negative value for the digital business, while lower-quality rivals command billions of dollars in equity value for comparable offerings.
In a note to clients today, B. Riley analyst David Bain reiterates a “buy” rating on Caesars, with a $191 price target — more than double where shares of the Harrah’s operator closed on Feb. 8. He notes the “low case” for Caesars’ online business is a valuation of $6.7 billion, which implies $31 a share.
In other words, at even no value for its digital business, CZR share price would be ~38 percent higher than yesterday’s close. Our base-case calculation shows an inferred digital valuation of ($13.8B) or ($64) per share, indicating a 78 percent share price increase when ascribing zero value for CZR’s digital business,” writes Bain.
Caesars has the brand recognition and resources to be dominant player in iGaming and internet sports wagering. Last year, the company said it’s planning a multi-year spend of $1 billion to gain market share in those arenas. Broadly speaking, analysts view those expenditures as appropriate, while noting the long-term digital opportunity for Caesars is attractive from an investment perspective.
Caesars Heading Toward New York Profitability
Caesars already commands the top spot in terms of market share in the newly open mobile sports wagering market in New York.
Alone, that’s impressive. But more importantly, Bain believes Caesars’ mobile sports betting business in the fourth-largest state will be profitable — a noteworthy feat, considering the state’s 51 percent tax rate and the fact that some operators are burning cash in states with far lower taxes on sports wagering.
“Net, CZR’s has recently captured a sustainable market share lead in OSB’s largest market, which should prove amply profitable over time,” says the analyst. “We also note that outside of its marketing push (which proved successful), NY market share indicates the Caesar’s brand clearly resonates, in our view.”
He adds that Caesars’ New York market share of around 40 percent today will eventually settle in the 25 percent area, and that the operator’s long-term earnings before interest, taxes, depreciation and amortization (EBITDA) margins in the state could reach 25 percent when factoring in benefits to its land-based casino operations.
Debt Reduction Another Catalyst
Caesars’ leverage is high and it’s contending with $26.93 billion in liabilities, indicating the investment community will be monitoring the company’s plans to reduce that number and its interest payments. Bain sees those efforts manifesting this year.
“Overall, we anticipate CY22E ~$5B of debt repayment and ~$4.4B in refinancing results in ~$300M of lowered interest costs/new FCF exiting this year. We forecast net leverage of ~2.2x by YE23 versus over 7x today,” notes the analyst.
He says Caesars could command around $3 billion by selling a Las Vegas Strip venue and up to $1.2 billion by divesting other non-core assets, which could occur in the second quarter.
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