Caesars Lands Another $100 Target as Analyst Says ‘Little Credit’ Assigned to Sports Betting Unit

Posted on: October 6, 2020, 12:09h. 

Last updated on: October 6, 2020, 12:55h.

Caesars Entertainment (NASDAQ: CZR) is making waves in the gaming industry as it pushes forward with a $3.69 billion takeover attempt of William Hill (OTC:WIMHY). One analyst sees significant upside ahead for the Flamingo operator.

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Bettors and staff at Caesars’ Tropicana sports, run by William Hill in Atlantic City. An analyst says some are undervaluing Caesars’ sports betting business. (Image: Wayne Parry/Associated Press)

In a note to clients Monday, Union Gaming analyst John DeCree reiterated a “buy” rating on Caesars stock while boosting his price target on the name to $100 from $60. DeCree is the second Wall Street analyst predicting the gaming company will ascend to the triple-digit club.

Despite the rapid growth of online casinos and sports wagering in the US markets aren’t adequately valuing those businesses at Caesars, according to DeCree.

Our $38/share valuation of the casino business implies the market is ascribing just $18/share (~$3.8bn) to CZR’s sports/iCasino business,” the analyst said.

Caesars stock is up almost 20 percent over the past month.  On Monday, the stock closed just over $57. This means DeCree’s new $100 price forecast implies upside of 75.4 percent.

Comparing Caesars Stock to DraftKings

Although its been public less than six months, DraftKings (NASDAQ:DKNG) is rapidly becoming the measuring stick for other sports wagering companies. Shares are retreating over the last two days. However, the stock nearly doubled over the past three months, and the sportsbook operator has a market capitalization of $20.87 billion, nearly double Caesars’ $11.44 billion.

DeCree says Caesars’ internet casinos and sports wagering businesses are undervalued relative to DraftKings. This is especially true when allotting for a potential combination with William Hill, according to DeCree. This means investors can access high-growth assets at more compelling valuations than are seen elsewhere in the industry.

“We estimate CZR (when combined with William Hill US) will generate comparable levels of US sports/iCasino revenue in 2021-22 as implied by DKNG Consensus estimates,” said the analyst. “In spite of this, the embedded value of CZR’s business is just a fraction (15%) of DKNG’s market value.”

DeCree says the valuation chasm between Caesars iGaming and sports betting units and DraftKings doesn’t need to close entirely to make the former worthwhile for investors.

“While we aren’t suggesting CZR’s should entirely close the valuation gap, we do believe there is significant unrealized value here,” he said. “The first step to unlocking that value is the pending acquisition of William Hill PLC that will give CZR 100% ownership of the US joint venture (up from 20%).”

William Hill Cashes Out

Last week, Caesars said it will dole out $3.69 billion in cash for William Hill. The British bookmaker’s board advised shareholders to accept this offer.

It’s essentially a foregone conclusion that the buyer will divest William Hill’s European operations, a unit valued at $2 billion on the low end. Assuming Caesars is able to close the deal and sell the European business at that price point, the company would receive more than $10 billion worth of value with William Hill USA for $1.7 billion, according to another analyst’s calculations.

Rumors are swirling competing bids for William Hill could emerge. But at this point, that’s just speculation. Caesars can compel the UK company to take its offer because if it doesn’t play ball, the Harrah’s operator will scrap its US agreement with the British betting house.