Caesars Entertainment (“CZR”) is conservatively worth $111/share (+45% upside) based on $93/share legacy brick and mortar business (~9x blended 2023 EBITDA) + $18/share digital online gambling option value (using DKNG as valuation marker). CZR was last written on VIC back in 2018 (2x), so plenty of good background info there to review. This is not going to be long write-up because my investment call is largely based on 2 themes/ dynamics:
Legacy gaming business is a big re-open winner as it offers both torque to leisure and corporate / convention business. Omicron was small speed bump, as 4Q21 Vegas occupancy averaged 86% in spite of big hits in last two weeks of December. January was 75% occupancy, February 80% and March expect to be back to mid 80s. So the bet here is basically that COVID is over.
Investor appetite for the Digital business has gone from max bullishness in 1H21 to max bearishness. DKNG stock has gone from $10 to $60 and now sitting at ~ $19. The concern is a market share war share for the next several years where everyone just burns cash for share. The same thing happened twenty years ago over discount brokerages (E*Trade, Schwab, Scottrade, Ameritrade, etc.). I submit to you that the concerns are massively overblown and commentary from CZR this evening supports this:
“You are going to see us dramatically curtail our traditional media spend effective immediately. We have accomplished what we set out to do. We set out to become a significant player and it's happened significantly quicker than we thought. And I think most of you know me as someone who is not one to way -- to spend any money needlessly. So we've gotten to where we need to be. You're going to see our commercials largely disappear from your screens. You're going to see some that we couldn't -- there is some media spend that we couldn't get out of coming into March Madness in a couple of states. But we will largely be off of traditional media, but other than in new launch states rom here. And we launched states in both iGaming and sports.”
Later in the call, management is pretty self-aware that digital is actually being valued as negative to the stock price:
“And hard to project that far in the future on that question. Obviously, it's going to depend on what does the valuation look like? If I'm still getting negative $15 a share for Digital. Maybe I become a buyer of my stock, but I would expect that we'll have corrected that at that time. And we'll see how the stock behaves. We'll see how it performs as we delever. I think that's going to be multiple enhancing. But by the time frame that you're laying out, we'll know that answer and be better informed.”
So I am calling the bottom on digital bearishness. I guess you could just go buy DKNG, but I am a sucker for value and would rather own CZR at a steep discount to the SOTP.
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise hold a material investment in the issuer's securities.
1) Conferences / convention comes back
2) Leisure demand continues to come back with COVID subsiding
3) Calling the bottom on Digital bearishness due to CZR management comments from this evening