CZR: [OVER]VALUATION TECHNIQUES

Plenty of errors, omissions, and questionable valuations in the recent analyst reports.

With the expiration of the quite period, many analysts have published research on Caesar’s Entertainment.  Most of the reports will provide a thoughtful and detailed overview of CZR's current markets and future growth opportunities. However, even some of the reports with less than positive ratings contained some questionable modeling and valuation assumptions.  

Here are just a few:

  • Ignoring CZR’s material CODI obligations.  Page 14 of CZR’s 10k says it best:
    • “In connection with the debt that we reacquired in 2009 and 2010, we have deferred related CODI of $3.6 billion for tax purposes (net of Original Issue Discount (“OID”) interest expense, some of which must also be deferred to 2014 through 2018 under the ARRA). We are required to include one-fifth of the deferred CODI, net of deferred and regularly scheduled OID, in taxable income each year from 2014 through 2018. To the extent that our federal taxable income exceeds our available federal net operating loss carry forwards in those years, we will have a cash tax obligation. Our tax obligations related to CODI could be substantial and could materially and adversely affect our cash flows as a result of tax payments.”
  • Using the book value of debt vs. face value of debt will get analysts an incremental $2.86BN of “value” – more than enough to get to a lofty stock price target
    • Most of the discount to face comes from the Second-Priority Sr. Secured notes
    • From a purely academic stance, if you believe that CZR’s debt is impaired, it’s unlikely that there would be any equity value –since equity is a residual value by definition
    • If CZR experiences a V-shaped recovery, their debt will rally back to PAR and can also trade at a premium to PAR
  • Over-valuing the US online gaming option
    • Analyst don't like to highlight the fact that near term Federal legislation is looking less likely these days.  That said, most analysts would agree that under a State by State legalization structure, the potential market size is smaller and would take longer to materialize.  
    • To be clear, we agree that a legal US online poker market would present a huge opportunity for Caesar's. We also agree that given the strength of their WSOP brand and nationwide recognition they would likely garner a decent piece of the online pie. While their online operations in Europe are currently immaterial and are unlikely to become material in the intermediate future, the experience of operating legal online gaming does provide them an advantage over other US land based operators. That said with the probability of Federal legislation looking more cloudy than a few months ago we think that a deeper haircut to this option is appropriate.  
  • Bad assumptions surrounding Playtika
    • One analyst attributed all of Corporate and Other revenue reported in the 4th quarter to Playtika.  Roughly $20-22MM of that revenue had nothing to do with Playtika and reflected the run rate of revenues in that line item before Playtika was consolidated.  The other $46-48MM reported in the 4Q represents Playtika revenues.  However, that amount represents catch up accounting for 2 quarters, not just one.  We estimate that 4Q Playtika revenues were roughly $28-31MM.