1 Main Capital - Caesars Entertainment: Digital Profitability Should Drive Stock Higher

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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 ...

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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 DisclosuresIn 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. 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