1 Main Capital – Caesars Entertainment: Digital Profitability Should Drive Stock Higher
Contributor since 2019 / 11951 Followers
Summary:
- Caesars Entertainment has experienced significant growth in EBITDAR, with nearly $1 billion coming from cost synergies and improved revenue optimization.
- The company’s EBITDAR is expected to reach nearly $4 billion in 2023, translating into over $2.6 billion of EBITDA and $1 billion of maintenance free cash flow.
- Caesars Entertainment has made substantial investments in new and existing growth projects, both in physical properties and digital marketing, with expectations of future earnings potential.
ExFlow
The following segment was excerpted from this fund letter.
Caesars Entertainment (NASDAQ:CZR)
Caesars Entertainment is one of the largest and most iconic gaming and hospitality companies in the US, with 52 properties across 18 states. The company’s hotels, restaurants, bars, entertainment, racing, retail shops and other services attract gaming customers. The physical properties and associated loyalty program also help the company acquire customers for its online sports betting (OSB) and online gaming (iGaming) platform.
The company is led by gaming veteran Tom Reeg, who oversaw significant value creation at Eldorado Resorts which went on to acquire the much larger Caesars portfolio in 2020. Since making the acquisition, the combined company has grown EBITDAR by nearly $1 billion, approximately half of which came from cost synergies, with the rest coming from improved revenue optimization and the elimination of inefficient customer promotions. For example, the company removed buffets across its properties, where it was losing over $100 million per year. As such, the company’s EBITDAR grew from nearly $3 billion in 2019 (pro forma) to nearly $4 billion in 2023.
CZR’s 2023 EBITDAR translates into over $2.6 billion of EBITDA and $1 billion of maintenance free cash flow. Importantly, >75% of total EBITDA comes from owned properties and >40% of total EBITDA comes properties owned in the capacity-constrained Las Vegas market. The value of this owned real estate is likely greater than the company’s current enterprise value.
Better yet, the $1 billion of maintenance FCF discussed above significantly understates the company’s future earnings potential. Despite its strong EBITDAR growth relative to pre-COVID levels, the company has made several substantial investments in its business that have yet to pay off.
On the physical side, CZR has deployed well over $1 billion into new and existing growth projects. This includes $650 million spent to build a new property in Danville, VA. It also includes $400 million for upgrades to its properties in Atlantic City and an additional $400 million for upgrades to its New Orleans locations. Typically, the company expects at a 15%+ return on such growth projects, though they caveat that Atlantic City will probably come in below that figure.
On the digital side, CZR has invested heavily in marketing and promotions to acquire customers over the last three years. Cumulative burn in this segment has been more than $1 billion in 2021 and 2022 combined. However, the digital business finally turned marginally profitable in 2023 and management expects that it should grow to $500 million of annual EBITDA within the next couple of years.
As the new projects come online, they will not only start to contribute to EBITDA, but growth capex should drop meaningfully as well. This will happen while the digital side of the business, which has a very long growth runway, continues to inflect. In a few years, CZR should be able to generate $2 billion annual free cash flow, or $9 per share. At that point, digital will still be growing nicely. As this happens, I believe that the stock should be substantially higher than its current levels.
| Important Disclosures
In general. This disclaimer applies to this document and the verbal or written comments of any person presenting it (collectively, the “Report“). The information contained in this Report is provided for informational purposes only and does not contain certain material information about 1 Main Capital Partners, L.P. (the “Fund“), including important disclosures and risk factors associated with an investment in the Fund, and no representation or warranty is made concerning the completeness or accuracy of this information. To the extent that you rely on the Report in connection with an investment decision, you do so at your own risk. Certain information contained herein was obtained from or provided by third-party sources; although such information is believed to be accurate, it has not been independently verified. The information in the Report is provided to you as of the dates indicated and 1 Main Capital Management, LLC and its affiliates (collectively, the “Manager“) do not intend to update the information after its distribution, even in the event the information becomes materially inaccurate. No offer to purchase or sell securities. This Report does not constitute an offer to sell, or the solicitation of an offer to buy, and may not be relied upon in connection with the purchase of any security, including an interest in the Fund or any other fund managed by the Manager. Any such offer would only be made by means of such Fund’s formal private placement documents, the terms of which shall govern in all respects. Performance Information. Unless otherwise noted, any performance numbers used in the Report are for the Fund’s Class A Interests, and are net of any accrued incentive allocation, management fees and other applicable expenses, include the reinvestment of dividends, interest and capital gains, and assume an investment from inception of such Class. As such, the performance numbers do not reflect the performance of any particular investor’s interest and you should not rely on it as a statement of your actual return. Past performance. In all cases where historical performance is presented, please note that past performance is not a reliable indicator of future results and should not be relied upon as the basis for making an investment decision. Risk of loss. An investment in the Fund will be highly speculative, and there can be no assurance that the Fund’s investment objective will be achieved. Investors must be prepared to bear the risk of a total loss of their invested capital. Portfolio Guidelines/Construction. Information contained in this Report, especially as it pertains to portfolio characteristics, construction, profiles or investment strategies or objectives, reflects the Manager’s current thinking based on normal market conditions, and may be modified in response to the Manager’s perception of changing market conditions, opportunities or otherwise, in the Manager’s sole discretion, without further notice to you. Any target strategies, objectives or parameters are not projections or predictions and are presented solely for your information. No assurance is given that the Fund will achieve its investment strategies, objectives or parameters. Index Performance. The index comparisons are provided for informational purposes only. The S&P 500 Total Return Index (SPXT) is a capitalization weighted index that is designed to measure the performance of the broad U.S. economy through changes in the aggregate market value of 500 stocks representing all major industries. There are significant differences between the Fund and the index referenced, including, but not limited to, risk profile, liquidity, volatility and asset composition. The index reflects the reinvestment of dividends and other income, are unmanaged, and do not reflect a deduction for advisory fees. An investor may not invest directly into an index. For the foregoing and other reasons, the performance of the index may not be comparable to the Fund’s and should not be relied upon in making an investment decision with respect to the Fund. No tax, legal, accounting or investment advice. The Report is not intended to provide, and should not be relied upon for, tax, legal, accounting or investment advice. Logos, trade names, trademarks and copyrights. Certain logos, trade names, trademarks and/or copyrights (collectively, “Marks“) contained herein are included for identification and informational purposes only. Such Marks may be owned by companies or persons that are not affiliated with the Manager or any the Manager managed fund and no claim is made that any such company or person has sponsored or endorsed the use of such Marks in the Report. Confidentiality/Distribution of the Report. The information in this Report is confidential. By accepting any portion of the Report, you agree that you will treat the Report confidentially. It is intended only for the use of the person to whom it is given and the Manager expressly prohibits its redistribution without the Manager’s prior written consent. The Report is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use is contrary to law, regulation or rule. |
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.