CZR 1.5.26
Analyst 1
I'm not sure how helpful it is to retrace the origin story of our involvement, since it started around the COVID era. Things have just totally changed, and the relevance of that thesis has dampened. I guess the way I'd frame our continued involvement in the business or in the stock is that the company is, in our view, just very undervalued. But more importantly, it's transitioning from a period of substantial reinvestment in the business that dampened cash flows. The company had been investing both in the physical assets, developing new casinos, refurbishing existing casinos, as well as standing up their digital business, which cost them over a billion dollars to do so. And now you're kind of migrating from a world where free cash flow was muted. You're going to be emerging into a world where there should be a substantial free cash flow inflection, which should allow the company to either repurchase stock, pay down debt, or create debt to equity transfer on what's a really thin market cap relative to our view of the underlying intrinsic value of the equity. That should progressively create a lot of value for shareholders from where the stock trades today, which is in the low mid-20s.
The other thing I'd layer on to that view is that we think the digital business is wholly undervalued and should support long-term earnings growth for the consolidated company. You know, at $500 million or so, it's going to be a low teens percent of total EBITDAR, but a much higher percent of total EBITDA because there are no leases attached to that business. And if you believe that business will grow over the next 10 years due to same-store growth in the United States and new legalization, then it's a really good growth engine embedded in an old-line business. We think that the business itself is probably worth the entire market cap today.
The past few years have been really disappointing from a company execution standpoint. In 2024, there were many air pockets in the regional business. You lap last year, but Vegas was increasingly weak in the second and third quarters, progressively improving in the fourth quarter. But looking into next year, we think there are many reasons why regionals should grow decently. Digital should grow very, very nicely. We think the company will do over $400 million in EBITDA next year. Vegas has really easy comps, and I think there are reasons for them to at least be stable year over year, if not grow modestly. But when you add those three things together, I'd hope the company, at a consolidated level, should grow EBITDA in the high single digits and maintain a lot of fixed financial leverage beneath that line. So free cash flow should grow substantially, and the company should be doing a billion-plus in free cash flow in 2026 relative to a $5 billion market cap. That's why we still own the position.
Analyst 2
Well, I own some other things. I think that where the market disconnects, or maybe the underappreciation by the market, is Vegas. Maybe people think they've burned post-COVID and then raising prices, and then the halo in Vegas became a bit of a sour, whatever you want to call it, right? You have this negative halo, or whatever the opposite of the halo is. So you have many assets, Vegas real assets, multiples have compressed, MGM and Caesars are cheap, and people know that. But part of it is they think they're over-earning, and they believe it deserves a lower multiple from both digital and prediction markets, which have come in.
I've actually been working on this a lot recently. This is just objective feedback, but I've heard some say, using DraftKings and FanDuel as examples, that you have digital-first or digital-only players that are sports betting at their core, and you've got Caesars and BetMGM. I know Caesars is 100% captive, and then BetMGM is the 50-50 JV. You've also got the prediction market players that have come in, and you could already compete with them, including Fanatics, which is both sports betting and prediction markets, and Kalshi and Polymarket. And if you look at all that, some would say, which is their view, not mine, that digital-first is best positioned, that the prediction markets may be a lot of low-calorie penetration at high valuation. They'll get on the margin, but inevitably, they'll get regulated. They think that both Caesars and MGM will struggle because their businesses are just inferior to DraftKings and FanDuel, particularly on the digital side. The offset to it, which they're talking out of two sides of their mouth, is that Caesars and BetMGM both have diversification.
They're obviously substantially cheaper, Caesars, BetMGM, and MGM, relative to the prediction markets. But I think that, for the time being, while these guys go into prediction markets like DraftKings and FanDuel, where there's no regulation, and it's fully rogue, with everyone saying Vegas is dead, it compresses the multiple. I think that they're in the penalty box even if earnings grow. They need to demonstrate not just resilience and durability, but also, like in the case of Caesars and MGM, buybacks, debt paydowns, and things like that. I think that if Vegas just improves off of a low base, that'll certainly help the multiple. But it's been a huge overhang, particularly last X number of quarters.
Analyst 1
I'm not sure if prediction markets are weighing on the brick-and-mortar gaming companies. That'd be hard for me to believe, but it's possible. It doesn't lend a positive tone to the headlines, but I don't think anyone really thinks that's going to disrupt their earnings power.
Analyst 2
So you're saying that prediction markets don't weigh on it?
Analyst 1
I don't think so. Not that I can disprove it, but yeah, I don't think public market investors are really giving any of these brick-and-mortar gaming companies credit for their digital businesses to begin with. I think it's impacted the multiple and the perception of the digital-only players much more than it has brick-and-mortar casino companies. It probably doesn't help on the margin.
Analyst 2
Right, I know what you're saying. I've heard this in conversations on external calls with others, where either current or former executives have said the market's well-capitalized. They're infringing on DraftKings and FanDuel. It's there. And people are concerned about regulation and companies like Caesars and BetMGM, which want to retain their gaming licenses, and this is a new area of growth, but on the margins, taking away.
I agree with you that the brick-and-mortar side is exceptionally cheap, with low single-digit EBITDA multiples and double-digit free cash yields, but I've heard this come up several times in conversation. That might be optics, whether the thing trades at 2.5x or 3x EBITDA, right? But obviously, the markets are right for whatever number of quarters now. Caesars and MGM have, at least in my observation, bottomed from a stock price perspective, right? Caesars in the teens has gone up, and MGM too. That could be a signal that the market believes the over-earning or some of the Vegas, as you said, since you're comping much easier comps now, right?
I'm pretty constructive on it. I think the businesses are pretty durable, and they'll generate a lot of cash. I think there's a fair amount of optionality, and that's sort of undeniable to me if you look at both BetMGM and Caesars. They have very real, profitable digital businesses here that generate cash and are growing. And seemingly, a more rational market, except for the footnote here or the asterisk that prediction markets would say, particularly for the 18 to 20 cohort, they're going to steal some share away, particularly in markets that don't have it. I don't know how they don't get regulated.