Caesars Stars Among Consumer Cyclical Stocks, Says Morningstar

• Stock is battered and weak Q2 Las Vegas data isn’t helping
• On the bright side, analysts view Caesars stock as deeply undervalued, implying significant room for upside

Caesars Entertainment (NASDAQ: CZR) traded lower Wednesday after the casino behemoth reported downbeat second-quarter results in its Las Vegas segment, but some analysts are defending the battered stock.

Much of that defense centers around the stock being undervalued, perhaps deeply so, particularly when accounting for increasing strength in the company’s interactive business. The near-to-medium-term issue for Caesars is that it depends on the Las Vegas Strip for nearly half its earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR).

The 2020 acquisition of “old Caesars” by Eldorado Resorts expanded the operator’s regional portfolio, which notched higher revenue in the second quarter, and continues paying dividends to this day while contributing to the undervalued thesis.

The Eldorado acquisition in 2020 roughly doubled the company’s US portfolio to about 50 properties while lifting its loyalty membership to over 60 million from 55 million,” notes Morningstar analyst Dan Wasiolek. “Caesars has realized over $1 billion in combined sales and cost synergies from its July 2020 merger with Eldorado, representing around a 30% increase to pro forma 2019 EBITDAR.”

Caesars appears on the research firm’s list of the top 12 consumer discretionary stocks to consider and it’s the only gaming name making that cut.

Caesars Stock Has Look of a Value Bet

For those willing to wager that Caesars stock is a credible value play, Morningstar has good news. The research firm says the shares are undervalued by 52% with a fair value estimate of $62, or more than double where the stock closed today.

Speaking of macro considerations, the operator used cash from the 2024 sale of the World Series of Poker (WSOP) to reduce interest expenses by $40 million, but the Federal Reserve didn’t oblige with a July rate cut. By some estimates, Caesars would save $60 million per year for every 100 basis points the Fed shaves off interest rates.

Caesars value proposition is linked to rates in another way. If prospective buyers of some of the company’s assets need financing, they may be apt to delay those purchases until rates come down. That delays Caesars’ ability to offload non-core assets and thus bring in cash that can be used to further pare outstanding liabilities.

Caesars Digital Adds to Value Case

Caesars online operations, which include the company’s eponymous internet sportsbook, are coming off one of the unit’s best quarters on record.

“Caesars’ 2024 digital revenue growth of 20% and EBITDA margin of 10% show that the company is positioned to benefit in a US online gaming market that we see reaching more than $50 billion by 2028 from $22 billion in 2024,” adds Wasiolek. “Despite competition from ESPN Bet, DraftKings, FanDuel, MGM, Fanatics, and others, we forecast 18% of Caesars’ total sales will be generated from online gaming by 2028.”

It remains to be seen if Caesars Digital’s rising revenue and increasing profitability spur management to spin off that entity – a frequent point of speculation — but the investment community widely believes the operator’s share price doesn’t adequately strides made in the interactive segment.