Caesars Entertainment (NASDAQ:CZR) and CZR stock are experiencing a renaissance of sorts. Last month, the company previously known as Eldorado Resorts cleared the last regulatory hurdle in its quest to buy the “old Caesars,” completing a $17.3 billion deal creating the largest U.S. casino company.
The buyer Eldorado assumes the Caesars name and stock ticker. More housekeeping: the company delivers its first earnings report as a combined entity today. Investors would do well not to be rattled by that update because it’s bound to be somewhat lumpy due to the logistics of the acquisition and because gaming industry earnings for the June quarter are proving dreadful due to shutdown forced by the novel coronavirus pandemic.
That doesn’t mean analysts and investors will be giving the new Caesars a “pass” on this upcoming earnings report. One issue the investment community is likely to focus on is progress on the previously stated goal of trimming $500 million in costs.
That was the number floated by management of the old Eldorado when the offer for old Caesars was unveiled in June 2019 and that’s the executive team running the show now. It’s going to take time to hit the $500 million figure. But progress on this front is essential because the buyer assumed $8.8 billion of old Caesars debt, vaulting the combined debt burden of the new company to about $13 billion.
Finding cost efficiencies is essential for multiple reasons. First, the Covid-19 shutdown proves Wall Street will punish indebted companies in down markets. Second, analysts expect Caesars’ debut burden will suppress free cash flow generation for a couple of years.
Reasons to Roll the Dice on CZR Stock
Caesars’ debt load is nothing to scoff at, but there are there several reasons why this is one of the most beloved casino stocks on Wall Street. First, there’s CEO Tom Reeg and the management team at the helm of the new Caesars. The old Eldorado was itself the product of multiple of acquisitions. Over the course of those deals, Reeg and team developed a reputation for realizing cost efficiencies that made those transactions more attractive with time.
As it is, Reeg recently commented that some cost cuts are already being realized. Additionally, there are plans to eliminate 1,000 mostly corporate roles in Las Vegas.
Regarding cash, Caesars has ample avenues for raising capital, including asset sales, which would also pare costs. It’s widely expected that the new Caesars will sell at least one, perhaps two, venues on the Las Vegas Strip over the next 12 months and up to three gaming properties in Indiana, among other possibilities.
Management isn’t afraid to part with assets it from which it feels it maximized value. Eldorado dumped multiple casinos to bring the Caesars buy across the finish line. However, investors shouldn’t be anxious for near-term asset sales because casino prices are depressed because of Covid-19.
Travel Trends Pose a Risk
Speaking of the pandemic, it’s weighing on Las Vegas travel trends. So much so that many travelers say they won’t return to Sin City until a vaccine is readily available. That scenario presents some risk to Caesars because it’s one of the largest operators on the Strip.
However, some of that risk can be mitigated due to a deep regional portfolio. Following the reopenings, both Eldorado and Caesars issued encouraging commentary about regional casino performances. Officials highlighted better-than-expected revenue and margin expansion.
Translation: folks still want to gamble. Even if they don’t want to hop on a plane to Vegas, they’ll get in a car to drive to a regional gaming venue.
Bottom Line on CZR Stock
The positives highlighted above don’t include iGaming and sports betting. These are two fast-growing segments in which Caesars has enviable brand recognition and competitive positioning.
Prior to buying Caesars, Eldorado had traditional sportsbook operations and limited online casino exposure. With the purchase, the buyer acquires strong footholds in two of the gaming industry’s growth frontiers. Some analysts argue this was never adequately reflected in old Caesars’ stock price.
Last year, Reeg noted it’s possible that those businesses could be spun off in the future to maximize shareholder value.
What’s impressive about the construct of the new Caesars is that some analysts believe, assuming the cost- cut goal is reached, this is a $100 stock. That’s $100 compared with about $37 today.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.
