HVS 3Q23: DG Capital On Caesars Entertainment

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Jacob Wolinsky
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Hidden Value Stocks issue for the third quarter ended September 30, 2023, featuring an update from DG Capital, discussing their top equity idea on Caesars Entertainment Inc (NASDAQ:CZR).

DG Capital Investment Idea: Caesars Entertainment

DG Capital is one of the most interesting hedge funds around. The firm focuses on finding value investments, notably distressed and recovery plays. It has the flexibility to invest across the capital structure and generally uses a combination of debt and equity to execute its trades.

Caesars Entertainment
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The firm runs two strategies: its flagship strategy and a concentrated version of the flagship, which has a 20% p.a. return target. It aims to hit this target with a focused portfolio of around 10 securities.

Since its inception on February 1, 2013, to the end of 2022, the concentrated strategy had returned 15.5% p.a. with a Sharpe ratio of 0.81 and a standard deviation of 18.1. The Russell2000 index returned 8.4% with a Sharpe ratio of 0.4 over the same time frame.

In the strategy’s second-quarter letter to investors, the fund laid out the thesis behind one of its top equity ideas, Caesars Entertainment:

“Caesars reported record Q1’23 results in May and expects a record full-year 2023 with an outlook to grow EBITDAR over the next two years by over 25% to more than $5bn. The company’s transformation to a vertically integrated omni-channel gaming company continues with a higher earnings and margin profile, material organic growth expected from existing operations and new projects, and near-term material positive contributions from mobile gaming and sports betting. Caesars’ near-term free cash flow will be used to retire debt, further de-levering the company. Near-term catalysts include the inflection to positive EBITDA by the digital segment, contributions from numerous capex projects, and the accretive purchase of its Indiana casino real estate by VICI Properties (NYSE: VICI).

Based on the company’s strong and improved financial profile, a share repurchase program could commence in 2024. Valuation is attractive at less than 7x NTM run-rate brick and mortar EBITDA (not including contributions from the digital segment). At conservative historical valuation metrics for this brick-and-mortar business (10x EBITDA/10% FCF yield), we see upside to $100/share, or approximately 100% to its quarter-end price. Adding contributions from the digital segment (EBITDA projection of over $500mm) using a similar conservative valuation framework would yield additional value of $30/share.”

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Jacob Wolinsky is the founder of HedgeFundAlpha (formerly ValueWalk Premium), a popular value investing and hedge fund focused intelligence service. Prior to founding the company, Jacob worked as an equity analyst focused on small caps. Jacob lives with his wife and five kids in Passaic NJ. - Email: jacob(at)hedgefundalpha.com FD: I do not purchase any equities to avoid conflict of interest and any insider information. I only purchase broad-based ETFs and mutual funds.