Shares of Caesars Entertainment (NASDAQ:CZR) are lower in midday trading after Morgan Stanley downgraded the largest domestic gaming company by number of venues.
In a note to clients Wednesday, analyst Thomas Allen points out that a new batch of coronavirus-related restrictions applied to casinos across the US are potentially problematic for the Caesars Palace operator. The Reno-based company runs more than 50 gaming venues across 17 states.
While CZR has attractive long-term opportunities in sports betting/online gambling and transaction synergies, we see near-term earnings risk from rising COVID-related restrictions exacerbated by high leverage,” said Allen.
Amid a recent surge in COVID-19 cases, casinos in Illinois, Michigan, New Mexico, and Rhode Island were ordered closed, while governors in Colorado, Indiana, Iowa, Maine, Massachusetts, Nevada, New Jersey, New York, and Ohio increased restrictions.
Of that group of states, Reno-based Caesars has venues in seven, meaning that its regional portfolio, which previously propped up revenue amid sluggishness in Las Vegas, is vulnerable to the new coronavirus protocols. Those include limiting the number of patrons that can be inside a casino at any given time. The Silver State is Caesars’ largest market, but as just three examples, the company runs a combined 11 venues in Illinois, Indiana and Iowa.
Still Mostly Optimistic
Following completion of the $17.3 billion acquisition that created Caesars in its current form, Wall Street is mostly bullish on the stock, with some analysts forecasting a rise to $100.
Morgan Stanley’s Allen takes a more measured view of the name, lowering it to “equal weight” from “overweight,” while modestly trimming his price target on the stock to $67 from $68. That’s slightly below the $69 area at which the shares reside today, and far off the consensus estimate of $73.15.
“With the stock up 18% year-to-date, we see it fairly valued on normalized earnings,” said Allen.
The analyst offers a bull case scenario in which Caesars could jump to $128 and a bear case situation, likely including lengthy closures of dozens of venues and a zero revenue environment, in which the name could decline to $32.
Waiting on Pent-Up Demand
With Nevada Gov. Steve Sisolak recently imposing new, tighter restrictions on the state’s gaming properties and restaurants, it’s clear 2020 is a wash for operators with major Strip footprints, including Caesars. Hopes for a late year recovery in Las Vegas are further stymied by rising coronavirus cases, high unemployment, and new controls in neighboring California, which accounts for almost 20 percent of the annual visits to Sin City.
Those scenarios confirm Caesars equity is tethered to coronavirus vaccine developments. Fortunately, progress is being made, and it could be just a few months before a treatment can be widely distributed.
That could facilitate the all-important pent-up demand scenario, which Morgan Stanley’s Allen sees Caesars benefiting from in the back half of next year and well into 2022.