Caesars Entertainment (CZR-NYSE) $19.95

April 29th, 2005 Research Digest Analyst: Naveen Sikka Ian Madsen, MBA, CFA, Editor 1-800-767-3771 ext. 417; [email protected] www.zackspro.com 155 North Wacker Drive  Chicago, IL 60606

Overview

Caesars Entertainment, Inc. is primarily engaged, through subsidiaries, in the ownership, operation and development of gaming facilities. The operations of the Company are conducted under the Caesars, Bally's, Paris, Flamingo, Grand, Hilton and Conrad brands. The Company, through subsidiaries, operates and consolidates 16 wholly owned casino hotels located in the United States of which seven are located in Nevada; three are located in Atlantic City, New Jersey; five are located in Mississippi, and one is located in New Orleans, Louisiana. In addition, the Company manages and consolidates an 82%-owned riverboat casino in Harrison County, Indiana; manages and consolidates the casino operations of Caesars Palace at Sea on three cruise ships; manages and consolidates an 86%-owned casino in Punta del Este, Uruguay, and manages and consolidates two majority-owned casinos in Nova Scotia, Canada. The Company is based in Las Vegas, NV and employs 50,000 people. For more information about the Company, visit its website at www.caesars.com/corporate.

Analysts have identified the following factors for evaluating investment merits of CZR.

Key Positive Arguments Key Negative Arguments  Company recently posted stronger-than-expected  Stock has little upside given the fact that the Q1’05 results on the backs of strong demand for proposed merger with Harrah’s is expected to close rooms in Las Vegas and Mississippi within the month; stock price already trading in-line  The street generally applauds management’s ability with the cash/stock offer to get the offer they did from Harrah’s  Company posted notably weak gaming win (lower slot and table volumes) in Q1

The Company recently reported strong Q1’05 results. EPS came in at $0.25, three cents ahead of consensus. Net revenues improved 2% YoY to $1.1B, largely in-line with street estimates. The stronger bottom-line results were due to outperformance in the Company’s Las Vegas & Mississippi properties partially offset by weakness in Atlantic City (AC). AC results were pressured due to increased competition and poor weather. Management did not host a conference call nor did they release any kind of guidance due to the imminent closing of the acquisition of the Company by Harrah’s (HET-NYSE). Analysts believe the closing of the deal

© Copyright 2004, Zacks Investment Research. All Rights Reserved. will be completed within months if not weeks. Analysts believe HET will be acquiring a very strong large-cap gambling operator, with CZR expected to complement Harrah’s portfolio of gambling properties as well as contribute to significant cost synergies.

Revenues

Net Revenue

Fiscal Year Ends: December Q1’05A Q2’05E Q3’05E Q4’05E FY2005E FY2006E $ in millions Digest High 1096.0 1097.0 1140.0 1033.0 4366.4 4526.6 Digest Low 1096.0 1064.0 1096.0 1032.0 4269.0 4526.6 Digest Average 1096.0 1080.5 1118.0 1032.5 4317.7 4526.6 Digest Average YoY Growth 1.91% -1.86% 1.50% 2.43% 2.62% 4.84%

Analysts are forecasting accelerated revenue growth over the next 1-2 years as the Company enjoys strong demand in its “West” operating region (namely the Las Vegas strip) and benefits from expected merger synergies once the HET deal is closed. Increased competition in AC does pose a threat to Eastern sales growth prospects.

Please refer to Zacks Research Digest spreadsheet for specific revenue estimates.

Margins

FY2004A FY2005E FY2006E Operating Margin 15.20% 15.01% 17.38%

Operating margins are forecasted to contract in FY2005 as the Company’s RevPAR numbers are pressured due to weaker-than-expected slot & table volumes on the LV strip. Lower costs as result of the proposed buyout by HET will likely lead to margin expansion beyond FY2006, which should benefit HET’s margins.

Please refer to Zacks Research Digest spreadsheet for more details on margin estimates.

Zacks Investment Research Page 2 www.zacks.com Earnings Per Share

Fiscal Year Ends: December 1Q05A 2Q05E 3Q05E 4Q05E FY2005E FY2006E $ in millions Zacks consensus 0.25 Digest High EPS 0.25 0.25 0.26 0.19 0.90 1.00 Digest Low EPS 0.25 0.17 0.18 0.08 0.67 0.85 Digest Average 0.25 0.21 0.22 0.13 0.80 0.90 Digest Average YoY Growth 10.5% 11.1% 2.2% 64.8% 14.3% 12.3%

Please refer to Zacks Research Digest spreadsheet for more extensive EPS figures.

Target Price/Valuation

Target prices for CZR stock range from $15 to $22 with an average of $18.86. Most analysts now derive their respective price targets based on the HET’s cash and stock offer for CZR. Analysts have varying price targets based on their assumptions of the forward value of HET following the closing of the acquisition and the effect it will have on HET’s stock (since two/thirds of the deal is in the form of HET stock).

Please refer to Zacks Research Digest Spreadsheet for further details on valuation.

Long-Term Growth

Long term growth rates for CZR range from 4% to 6.5%. Since the closing of the HET deal is expected in the near-term, analysts do not comment on the longer-term prospects of CZR. Analysts do however believe HET’s acquisition of CZR will prove to be lucrative given the cost and operating synergies expected as a result. The combined entity will be the largest gaming operator in the world with above-average EBITDA growth rates, strong leverage, a vast and diversified property portfolio (especially on the LV strip) and the opportunity to expand internationally.

Zacks Investment Research Page 3 www.zacks.com Individual Analyst Opinions

POSITIVE RATINGS

Legg Mason (04/22/05) – The stock is rated a BUY with no given price target. Analyst reiterates his buy rating given CZR’s link to HET shares with the expected closing of the acquisition to happen shortly.

NEUTRAL RATINGS

Calyon Sec. (04/25/05) – The stock is rated NEUTRAL with a $20 price target.

Deutsche Bank (04/21/05) – The stock is rated a HOLD with a $16 price target. Analyst remains neutral on the stock given its obvious link to HET shares while waiting closing of the acquisition.

Goldman (04/21/05) – The stock is rated IN-LINE with no given price target.

Harris Nesbitt (04/21/05) – The stock is rated NEUTRAL with no given price target. Analyst believes the shares are fairly valued “given its arbitrage nature associated with the acquisition” by HET.

MSDW (04/22/05) – The stock is rated EQUAL WEIGHT with a $15 price target. Analyst notes that assuming the merger with Harrah’s go through, he values CZR shares at around $24.

Smith Barney (04/21/05) – The stock is rated a HOLD with a $21.50 price target.

UBS (04/21/05) – The stock is rated NEUTRAL with a $20.50 price target.

Wells Fargo (04/21/05) – The stock is rated a HOLD with no given price target.

NEGATIVE RATINGS

Lehman (04/22/05) – The stock is rated UNDERWEIGHT with a $22 price target.

Prudential (04/21/05) – The stock is rated UNDERWEIGHT with a $17 price target.

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