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Bear of the Day: Caesars Entertainment (CZR)

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Gaming stocks have had it rough of late with occupancies and gambler visits plummeting. The Covid-19 shutdowns have had a devastating effect on leisure activities and trips that include casinos were among the hardest hit.

Anyone who has visited the US gambling mecca of Las Vegas recently can attest that pure gambling activity has taken a backseat to other entertainment options there. There are more shopping, dining and live entertainment options than ever and the casino is no longer the focus of the multi-billion dollar resorts that are being built.

Prior to 2020, it actually an impressive success story for Las Vegas casino operators. Gambling was once legal only in the state of Nevada (and a small part of New Jersey) and Las Vegas had a monopoly as the go-to destination for serious gamblers. Over the past 20 years however, many states have made various forms of wagering legal and the average American can drive to a casino to bet their money much more easily than they can book a flight to “sin city.”

While overall commercial gaming revenues in the US hit an all-time high of $43.6 billion in 2019, the proliferation of gambling venues all over the country means the pie is being split more ways than ever and smaller operators are seeing a reduction in gambling profits.

(That same heavy focus on gambling used to be the dominant model in Las Vegas as well, but resorts there now make significant profits on lodging, food and beverage and other attractions rather than basically giving them away.)

The legalization of online sports betting also threatens to infringe on what was once a Vegas monopoly, though the relative dearth of live sporting events in 2020 has made a careful analysis of the true effects of electronic gaming difficult.

This year, two domestic casino operators combined operations and though the deal was proposed well before the pandemic, the merger almost couldn’t have happened at a worse time.

Eldorado Resorts casinos were primarily in smaller markets adjacent to urban centers and nine of its casinos were acquired during an M&A binge in 2018. The total cost was just a hair over $1.2B. In fact, all but 7 of Eldorado’s properties were acquired in the past three years. Total debt at the company increased from $800M at the end of 2016 to $3.26B at the end of 2018.

In 2019, Eldorado announced the deal in which they would purchase Caesars Entertainment (CZR - Free Report) in a bid to compete with larger Las Vegas operations like Wynn Resort (WYNN - Free Report) and Las Vegas Sands (LVS - Free Report) . Caesars emerged from Chapter 11 bankruptcy just three years ago after its own struggles in the new era of gambling.

The cash and stock deal was worth approximately $17B including Eldorado’s assumption of Caesar’s $8.8B in debt and closed in July 2020. The combined company took the better-known "Caesar’s" name.

It’s been somewhat of a bloodbath. Caesar’s is expected to lose a whopping $11.91/share in 2020, down from a net profit of $1.47/share in 2019. Though a bounce off of those lows is predicted in 2021, the Zacks Consensus Earnings Estimate for next year still anticipates a loss of $2.17/share.

Recent downward earnings revisions for full-year 2020 earn Caesars Entertainment a Zacks Rank #5 (Strong Sell). The Caesar’s deal added so much debt to the Eldorado balance sheet that their ability to compete in the competitive gaming space is being seriously questioned by analysts.

The casino gaming industry faces serious challenges. The best bets include companies with significant online operations and/or overseas properties.

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Las Vegas Sands Corp. (LVS) - free report >>

Wynn Resorts, Limited (WYNN) - free report >>

Caesars Entertainment, Inc. (CZR) - free report >>