TRADE ALERT - Core Portfolio September 2025

Right now, there are growing fears that we might be headed into a recession.

The job market is cooling at a rapid pace.

Consumer spending is softening.

And the trade war is leading to higher input costs and significant uncertainty.

The market is reacting to this by running away from cyclical stocks, which have taken a beating so far this year.

Even worse are businesses that also rely on international tourism, as many have decided to boycott the USA and spend their money elsewhere.

A great example of that is Caesars Entertainment (CZR), which is one of the leading casino operators in the US:

The market fears that as the economy weakens further, people will spend less on gambling and entertainment, which are some of the purest forms of discretionary spending. Moreover, a lot of international tourists, especially from Canada, Mexico, and China, are now skipping their trips to Las Vegas.

The impact has been so significant that the Las Vegas Convention and Visitors Authority is now taking actions to try to lure back Canadians. Here is what they said in a recent statement:

"A portion of our friends in Canada are not happy with us right now. We want them to come back, but we understand they may not be ready to do that." Steve Hill, CEO of the Las Vegas Convention and Visitors Authority

This led to a soft summer for Las Vegas and caused CZR's stock to drop another 25%:

Data by YCharts

All else held equal, we agree that a weaker economy and lower international tourism would justify a lower valuation for a company like CZR.

But all else is not equal.

Most importantly, the company's digital business is exploding to the upside at the moment. In the second quarter, it had its biggest quarter ever by far, earning $80 million of adjusted EBITDA, and the management noted that they expect their digital business to earn $500+ million of adjusted EBITDA in 2026! That's up from $195 million over the trailing 12 months. Here is what their CEO said:

"Digital had a fantastic quarter... we remain on track to deliver $0.5 billion plus of EBITDA in '26. The momentum in Digital is extraordinary, both from a volume and an EBITDA perspective." Thomas Robert Reeg, CEO of CZR

As we noted in our initial investment thesis, CZR is in an ideal position to compete in this space because it has the biggest loyalty program in the casino sector with over 65 million people, and it can leverage its platform to grow its digital business with limited marketing spend. There are also significant synergies between its physical casinos and its digital business. As an example, as people spend money at the Caesars Palace, they then gain Caesars Reward Points, which they can then use to gamble on the app. Similarly, as they gamble through the app, they get Rewards Points, which they can then redeem for free drinks, meals, and hotel rooms at CZR's casinos. Its competitors, who run a digital-only business, cannot offer such perks as cost-efficiently.

They are now scaling the digital platform at a rapid pace, and as it hits $500+ of annual EBITDA in 2026, it will be worth a lot of money.

According to Texas Capital analyst David Bain, the average EBITDA multiple of pre-play digital peers DraftKings (DKNG), Flutter Entertainment (FLUT), and Rush Street Interactive (RSI) is 19.2x.

If we applied that multiple to the $500 million of annual EBITDA, CZR's digital business would be worth $9.6 billion.

That's huge when you consider that the company's current market is just above $5 billion.

And that's just the start.