Bank of America is reconfiguring its ratings on casino equities and it’s moving Caesars Entertainment (NASDAQ:CZR) ahead of Wynn Resorts (NASDAQ:WYNN) on the list.
In a note to clients today, the bank upgrades the Caesars Palace operator to “buy” from “neutral” while paring its rating on Wynn to “neutral” from “buy.” Bank of America is enthusiastic about Caesars’ increasing exposure to the fast-growing iGaming and sports wagering industries.
We think CZR can transform (again) into an omni-channel winner with accelerating online market share. Today CZR sits at <3% digital market share, but we think this is poised to rise via a large $1.5B budget over the next 2.5 years, strong front end partnerships (ESPN, CBS, NFL) and an experienced back end and tech team powered by William Hill, and Total Rewards,” said the bank.
Last week, Caesars unveiled the new look Caesars Sportsbook while saying it plans to spend at least $1 billion over the next couple of years as looks to catch up to rivals such as FanDuel, DraftKings and BetMGM.
For Caesars, Domestic Is Better
Part of the reasons Bank of America is bullish on Caesars is the operator’s heavily domestic footprint, which levers it to strength in regional markets as well as the ongoing recovery in Las Vegas.
While a new mask mandate has come to Nevada, stoking concern about the outlook for convention and meeting business into year-end, Sin City is still recovering from the coronavirus pandemic than Macau. That’s a boon for Caesars because it’s the second-largest operator on the Las Vegas Strip.
Additionally, the company has limited international exposure and appears more interested in parting with what non-US assets it has than acquiring more. That includes the sale of William Hill’s betting shops and European online gaming business. That transaction, for which a buyer is expected to be announced in the fourth quarter, will drum up proceeds Caesars can use to fund its online expansion efforts.
“To fund this transition, CZR now has a strong, cash generative land based casino business that should deleverage rapidly and throw off meaningful cash flow,” said Bank of America.
Wynn Plagued by Macau
In downgrading Wynn, Bank of America highlights the familiar issue of Macau. Prior to the coronavirus pandemic, the world’s largest casino center accounted for 70 percent of the operator’s earnings before interest, taxes, depreciation and amortization (EBITDA).
Ongoing visa restrictions and lack of a travel bubble with Hong Kong are among the issues weighing on Macau concessionairies, including Wynn. While authorities there are reluctant to implement another casino shutdown, the situation is tenuous following last week’s news of a local family of four contracting COVID-19, representing the special administrative region’s (SAR) first cases in over 500 days.
Bank of America also mentioned geopolitical tensions between the US and China as a potential drag on Wynn stock. However, prevailing wisdom among market observers is that the three US-based concessionaires — Las Vegas Sands, MGM and Wynn — will likely have gaming permits renewed along with their Asia-based rivals next year.
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