In the glittering world of high stakes and perpetual motion, the tale of Caesars Entertainment is like a game of Poker with its share of highs and lows. The stock of the famed casino operator (NASDAQ: CZR) has navigated through a challenging year, descending by 24.64%, while the broader S&P 500 index ascended by a modest 7.57%. Despite this disparity, the tide of opinion in the investment world is shifting, with a surge of optimism from certain quarters of the buy-side community.
Within the storied corridors of Caesars’ majestic empires, from the neon haze of the Vegas Strip to the stately presence of Atlantic City’s boardwalks, there has been spirited investment – in fortune’s name. Flashes of brilliance and potential beckon, notably from 1 Main Capital. This boutique investment firm, led by the astute Yaron Naymark, has embraced the potential of Caesars, hoisting the stock to the top five assets within its trove. This endorsement draws vigor from the robust arm of the gaming giant: its interactive force that spearheads online sports betting ventures with gusto.
Yaron Naymark, the eagle-eyed founder and portfolio manager of 1 Main Capital, penned a compelling narrative to his clientele. With a tactician’s insight, Naymark described the firm’s strategic positioning, having acquired a new stake in Caesars during the initial quarter – a significant move, demonstrating confidence. “On the digital side, CZR has invested heavily in marketing and promotions to acquire customers over the last three years,” Naymark elucidated in his missive. “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.”
Not all gambles yield immediate dividends, a lesson reflected in Caesars’ recent first-quarter revelations. The operator’s fortunes were swayed by the precarious hooks of chance – an unfavorable Super Bowl and an unpredictable March Madness, casting shadows on its interactive outcomes. Yet, the guiding spirit of Caesars remains undeterred, resolute in the belief of a prosperous horizon for its ventures.
The narrative of renovation and growth runs parallel to the digital tale, with 1 Main Capital forecasting a boon from Caesars’ substantial capital investments. Like a craftsman reimagining his canvas, Caesars is in an era of rejuvenation, adding new palaces like the heralded Caesars Danville in Southern Virginia, and bestowing a fresh charm on the legends of old, such as the transition of Harrah’s New Orleans into Caesars’ illustrious fold.
“Naymark expressed admiration for this monumental outlay, recognizing the potential yields. The company has embarked on a journey of transformation, spending over $1 billion on construction and modernization endeavors,” he remarked. “This includes $650 million splayed out on the birth of a property in Danville, VA, with an additional $400 million uplifting the splendor of Atlantic City and a further $400 million rejuvenating New Orleans. Expectations amid these undertakings run high, with an anticipated return of 15% or more, though Atlantic City might stray below this forecast,” Naymark surmised.
Caesars’ chief, CEO Tom Reeg, in the harmony of a quarterly financial symphony, hinted at a potential divestment of less essential gaming domains – a move poised to fortify the free cash flow, a lifeblood for the Caesars enterprise.
Speaking of Free Cash Flow – the lore of liquidity remains a poignant chapter in the saga of Caesars’ fortunes. The stock showcases a promising free cash flow (FCF) yield of 12%, a beacon for value hunters sensing that the shares may be undervalued. 1 Main Capital’s Naymark, a guardian of the firm’s vision, projects a compelling trajectory for Caesars’ FCF. He envisages a flourishing future where Caesars might generate a staggering $2 billion in annual free cash flow, a boon of around $9 per share. The digital realm, too, is foreseen to continue its ascent.
“In a few years, as the wheels of fortune spin, we could witness a grand unfolding where Caesars, flush with burgeoning free cash flow, will see its stock rise to levels far surpassing the present,” Naymark prognosticated with a glint of confidence as the final stroke in his prescient forecast.
