Odds Getting Longer For Caesars Entertainment

Caesars Entertainment (Nasdaq: CZR  ) has released its first earnings report since reentering the public markets, and the company's odds don't appear to be getting any better. Growth in the Las Vegas market hasn't been able to mask weakness in others and the company's debt continues to grow as the company barely makes enough money to pay its bills. Let's dig into what the numbers tell us.

Some growth is better than no growth
While Strip competitors Las Vegas Sands (NYSE: LVS  ) , Wynn Resorts (Nasdaq: WYNN  ) , and MGM (NYSE: MGM  ) are recording strong revenue and EBITDA growth in Macau, Caesars has been left toiling in the Las Vegas and regional markets. Las Vegas Sands, for one, grew revenue 26.3% in the most-recent quarter, to $2.54 billion. By comparison, Caesars grew revenue at a rate of 2.4% in the fourth quarter and a miniscule 0.2% for the year.

Adjusted EBITDA, the proxy we use to approximate how much cash the company's capital investments are producing, rose a little more than revenue at a 5.9% rate, to $466.0 million, due to some cost-cutting measures Caesars implemented.

Atlantic City, which accounts for 19.1% of revenue, continues to struggle as revenue fell 0.7% in the quarter. For the full year, revenue fell 3.2% and I don't have a lot of confidence that a rebound in Atlantic City is imminent.

The Louisiana/Mississippi region was the worst performer, with quarterly revenue falling 9.0% and full-year revenue falling 7.5%.

The $20 billion problem
Management has been on an "amend and extend" campaign to push the company's debt obligations to later dates, and as the company successfully pushes maturities out further, it reduces short-term risks that could come from maturing debt. But it doesn't eliminate the debt altogether.

What's alarming at Caesars is the size of the debt and how management has allowed it to grow. At the end of 2011, long-term debt stood at $19.8 billion, a 5.2% increase from a year ago, and that doesn't include the $1.25 billion the company priced a few weeks ago.

In 2011, Caesars had $2.12 billion in interest expenses and made just $1.94 billion in EBITDA to pay for it. With these kind of numbers, it's easy to see why debt is growing faster than EBITDA. If that doesn't change, Caesars will start circling the drain and eventually investors will be left empty-handed.

To make matters worse, management is considering spending even more money to expand into Massachusetts instead of using it to reducing debt.

Trying to turn the ship around
Caesars is known for its giant Las Vegas resorts, but the company actually generates most of its revenue outside of Las Vegas. That's not a good sign, because regional operators like Boyd Gaming (NYSE: BYD  ) and Penn National have been reporting mediocre earnings, and with competition increasing, the future doesn't look bright. If gaming expands in Massachusetts and Florida, that would be even more competition for Caesars' existing properties to contend with.

Like MGM, Caesars is hoping that online poker will be a driver of future growth, and that could actually push the company's EBITDA above interest costs if it comes to pass. For now, though, online gaming isn't legal, and in an election year I'm not making any bets that it will be embraced on a federal level.

Strike Three -- you're out
Caesars really has three things working against it when compared to other gaming companies:

  1. The $19.8 billion debt load is like an anchor that will slowly bring the company down.
  2. The company has no exposure to gaming in Asia -- where Las Vegas Sands, MGM Resorts, and Wynn Resorts are all investing most of their time and capital.
  3. The regional gaming market is even weaker than that in Las Vegas and will continue to be a drag on operations.

I'm not suggesting that Caesars is going bankrupt any time soon. Companies go bankrupt because they run out of cash, not because the rack up too much debt or losses. With debt maturities pushed out to at least 2015, the company has time to make improvements. I'm just not betting that Caesars is in position to make the improvements I think are necessary.

When I compare it to Las Vegas Sands, Wynn, or Melco Crown, I just can't see how Caesars is a good stock investment right now. In mid-February I calculated Wynn's EV/EBITDA ratio to be 9.9 and Las Vegas Sands' to be 12.6 before accounting for Sands Cotai Central. Caesars' debt alone is 10.2 times EBITDA, and with slower growth and less-attractive future markets than its competitors. That's not a bet I'm willing to make and I'll keep my underperform CAPScall on My CAPS page.

Interested in reading more about Caesars Entertainment? Click here to add it to MyWatchlist, and it will find all of our Foolish analysis on this stock.

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

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  • Report this Comment On February 29, 2012, at 7:46 PM, chas0204 wrote:

    Does anyone really listen to Motley anymore? You guys are always after-the-fact. Nothing that you ever report is "eye-opening". You merely state the obvious. You were predicting doom and gloom since the IPO and now this article after Motley was wrong once again. I give up with you guys.

  • Report this Comment On February 29, 2012, at 8:33 PM, cp757 wrote:

    Travis this was a great report. I cant believe this aging, once iconic behemoth can stay alive in Atlantic City,or any of the markets they are in. Atlantic City is still losing market share every month. That's the nature of any area that has seen its day. Just like the ghettos of every major city ,with out the destruction of the buildings and new dreams built, the area dies. In Las Vegas Steve Wynn understood that and tore down the old and brought in the new with huge fan fair. Caesars entertainment needs to tear down most of their buildings but they cant afford to. Loveman continues to add more debt and it will crush them. Its the same in Macau the old casinos in down town Macau have already become passe' and Cotai Central is the new center of the gambling universe. This dept Caesars Entertainment has will in the end put them in bankruptcy. Legal problems are rampant in the gaming sector. Just like Loveman is battling to keep the bill collectors from his door Steve Wynn is in the battle of his life to throw out his friend and partner Mr Okada and the case has just started. Not only does Wynn have to pay his own lawyers, but he will have to pay for Mr. Okada’s legal counsel in defending against the company’s lawsuit. Wynn’s articles of incorporation are typical, providing for indemnification of legal fees resulting from litigation related to a director’s conduct. By accusing him of breaching his fiduciary duty as a director, the company will be on the hook for any costs in defending against its lawsuit. By invoking the specter of overseas bribery, Wynn has effectively opened itself up to a wide-ranging federal investigation of its dealings in Macau and elsewhere. Combined with the lawsuit it filed against Mr. Okada, the company likely will face soaring legal costs over the next year or two as it deals with the fallout from the dispute.Wynn may have breached privacy law's. Steve Wynn has brought the investigation to the attention of regulators that will now look at Steve Wynns guests. That will not be good. Official Chinese media reports found that ‘‘57 percent of Chinese high-stakes gamblers in Macau are either government officials or senior managers in state-run companies. On average, these officials and managers each lost USD 3.3 million dollars, nearly all of it public money,’’ . But some believe the real impact on Wynn Macau’s earnings is yet to be determined. The government oficials will go to the new Cotai Central rather than be exposed to the scrutiny of the investigation of Wynn. The industry is in a time of great change and the billionaires that play this game know the stakes are high. It has become a very nasty business, dragging the players through the mud. I just have a hard time seeing what anyone sees in some of these players but your story makes it very visible.

  • Report this Comment On March 01, 2012, at 2:38 PM, cp757 wrote:

    Travis I just thought of a perfect way to explain Caesars Entertainment. Its just like Mel Brooks play The Producers. That story concerns two theatrical producers who schemed to get rich by overselling interests in a Broadway flop. The story turned out good but they had only debt from the investors in the play to worry about. With the Caesars Entertainment scam they just sell every thing they have without letting anyone know that they are selling way more than the 125.02M shares they had in the IPO .The debt of 22 billion and the phony goodwill of 3.4 billion on the books are just iceing on the cake. I thought that Loveman could try out for one of the rolls in "Springtime for Hitler" that's my favorite part, but I don't know if he wants to be in the play. The market makers have done a great job keeping the stock up while the insiders get out but this play will end as a flop.

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