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Morningstar | Caesars' 1Q Aided By Solid Vegas RevPAR and Favorable Hold; Shares Undervalued

We plan a low-single-digit percentage increase to our $10.30 per share valuation for no-moat Caesars, due to strong first-quarter Las Vegas hold (house played lucky) and hotel performance (occupancy up 250 basis points to 95%). Trading at 10 times our 2019 EV/EBITDA we see shares undervalued.

Las Vegas (45% of 2018 total net sales) revPAR growth of 4.9% surpassed no-moat MGM's 3.7% lift in the quarter, although we believe the latter's higher mix of VIP (weak overseas China play) and convention (weak event calendar) visits created a relative headwind. Still, Caesars' hotel sales growth of 8% in the quarter was solid and helped drive total revenue growth in the region to 5.8%, although we believe the vast majority of this sales growth was attributable to favorable hold. As a result, we plan only a slight increase to our 2% 2019 Vegas sales estimate. Meanwhile, Vegas EBITDAR margins jumped 220 basis points to 37.7%, which was also mainly due to favorable hold. Therefore, we don't plan to materially change our 2019 EBITDAR margin estimate of 36.5%, up 20 basis points.

Other U.S. (regional properties that were 48% of total 2018 net sales) posted mix results. The Centaur properties (acquired July 2018) added 13.6 percentage points of sales growth, while all other properties saw a revenue decline of 4.5%, driven by continued promotional competition in Atlantic City. This competition also drove total Other U.S. EBITDAR margins down 20 basis points to 23.1% (down 170 basis points to 21.6% when excluding the Centaur acquisition). And although promotional activity begins to anniversary in the second half of 2019, we plan to slightly reduce our 2019 EBITDAR margin for the segment of 25.7% (60 basis points expansion) toward 25.3% (20 basis points of expansion), to account for a heightened level of competition through 2019.

New CEO Anthony Rodio takes over May 6, 2019, replacing Mark Frissora, who was driven out by pressure from Icahn. We are favorable on the hiring of Rodio given his extensive industry experience. Rodio brings nearly 40 years of U.S. gaming industry experience, which should prove valuable to allowing Caesars to maintain its positioning in the low-growth low-barrier U.S. casino landscape. From 1980 to 2005 Rodio worked for Caesars brand Harrah in Atlantic City, and knowledge amassed here can help Caesars in this competitive regional market, as can the three years he served as president of Atlantic City Hilton from 2005 to 2008. We also believe Rodio's experience leading U.S. regional gaming assets over the past 10 years will provide value. From 2008 to 2011 Rodio was vice president and general manager of the Hollywood Casino in Indiana (currently owned by Penn National Gaming), which was then followed with a CEO position at both Tropicana in Atlantic City and at Affinity (which operates 11 regional casino properties) during 2012-18 and 2018-19, respectively. In particular, Rodio's time at Tropicana provides value, as he worked with Icahn to reinvest in the struggling asset and eventually sell the property to Eldorado in 2018.

Caesars remains favorable on the sports betting opportunity and is hopeful that Pennsylvania and other states will soon pass legislation to allow such wagering, which would benefit the company given its exposure to 13 states (including Pennsylvania) and its leading loyalty program of 55 million members. Caesars currently has 17 total sports books and partnerships with the NFL, Bleacher Report, Turner sports, and DraftKings.