Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Caesars Entertainment Inc (CZR, Financial). The stock, which is currently priced at $53.32, recorded a loss of 2.97% in a day and a 3-month increase of 10.93%. The stock's fair valuation is $95.35, as indicated by its GF Value.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
Unpacking the Risks of Investing in Caesars Entertainment (CZR, Financial)
However, investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Caesars Entertainment should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.67. These indicators suggest that Caesars Entertainment, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Understanding the Altman Z-score
Before delving into the details, let's understand what the Altman Z-score entails. Invented by New York University Professor Edward I. Altman in 1968, the Z-Score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
Introducing Caesars Entertainment
Caesars Entertainment includes around 50 domestic gaming properties across Las Vegas and regional markets. Additionally, the company hosts managed properties and digital assets, the latter of which produced material EBITDA losses in 2022. Caesars' U.S. presence roughly doubled with the 2020 acquisition by Eldorado, which built its first casino in Reno, Nevada, in 1973 and expanded its presence through prior acquisitions to over 20 properties before merging with legacy Caesars. Caesars' brands include Caesars, Harrah's, Tropicana, Bally's, Isle, and Flamingo. Also, the company owns the U.S. portion of William Hill (it sold the international operation in 2022), a digital sports betting platform.
Dissecting Caesars Entertainment's Low Altman Z-Score
A dissection of Caesars Entertainment's Altman Z-score reveals Caesars Entertainment's financial health may be weak, suggesting possible financial distress:
Conclusion: Navigating the Thin Line Between Value and Trap
Despite the attractive valuation of Caesars Entertainment, the low Altman Z-score suggests potential financial distress, indicating that the company might be a value trap. Therefore, investors need to conduct thorough due diligence before making an investment decision.
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