Caesars Entertainment Shares Slide, Optimistic Investors Eye Potential Rebound

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Despite the S&P 500 climbing by 7.57% year-to-date, shares of Caesars Entertainment (NASDAQ: CZR) have slumped, experiencing a downhill slide of 24.64%. Yet, a selection of investors from the buy-side community are buoyed by the casino operator’s potential trajectory.

Nestling among the neon lights on the renowned Las Vegas Strip is the iconic Flamingo casino, operated by Caesars Entertainment. Notably, this establishment has recently come under the encouraging eye of 1 Main Capital. In a recent dispatch to clients, Yaron Naymark, founder and portfolio manager of the boutique investment firm, outlined that a fresh position in Caesars had been launched during the first quarter. Such a move has now thrust the stock into the upper echelons of the money manager’s list of top five holdings.

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A part of this expressed zeal for Caesars can be attributed to the gaming company’s digital branch, which encompasses online sports betting activities. Naymark penned that over the past triennium, CZR has poured substantial funds into digital marketing and promotional activities as a means to acquire new customers. “Cumulative burn”, as Naymark phrases it, in this segment has tallied over $1 billion in the combined years of 2021 and 2022.

Yet the winds of change seem to be blowing favorably for the casino operator. Naymark asserts that digital operation began to dribble profits in 2023, and the management anticipates it could expand to a hearty $500 million annual EBITDA within the next few years.

Despite some unfavorable elements impacting the start of the year, specifically lower than anticipated gains from the Super Bowl and March Madness, the management remains optimistic about the long-term horizon.

Caesars is not alone in undergoing a considerable capital spending cycle. The casino operator, like many of its rivals, is vigorously introducing new venues and refurbishing existing gaming properties.

One example of this is Caesars Danville in Southern Virginia. Having come online just a year ago, this operator is now replicating the transition process with Harrah’s in New Orleans, shifting to the Caesars Palace branding. The operator is also investing in revamping casino hotels in Atlantic City, among other locations across the nation.

Naymark sees potential in this strategy, believing that these ventures could yield long-term dividends. On its earnings conference call, Caesars CEO Tom Reeg hinted that the operator might sell off some “non-core” gaming venues that aren’t generating sufficient free cash flow. This could likely occur this year.

Free cash flow (FCF) potential has been the lynchpin in investment considerations concerning Caesars. As this figure increases, Naymark of 1 Main Capital envisages the FCF trajectory to be alluring in the long run, possibly leading to significant augmentation of the share price.

The future could hold more good news for Caesars. As Naymark sees it, the operator should generate annual free cash flow to the tune of $2 billion, or $9 per share. He added that “As this happens, I believe that the stock should be substantially higher than its current levels,” potentially heralding promising days ahead.