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Could Caesars Be a Millionaire Maker Stock?

By Travis Hoium - Feb 20, 2021 at 1:00PM

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Caesars is a gamble for any investor.

Caesars Entertainment (CZR -2.45%) has been one of the most turbulent companies in the gambling industry over the past two decades. The company was taken private when it was known as Harrah's Entertainment, subsequently went public again, and saw its largest subsidiary go bankrupt. Now its stock is trading near all-time highs despite business collapsing because of the pandemic. 

Amid the turmoil, Caesars has expanded its business by merging with Eldorado Resorts, and it has announced the acquisition of its online gambling partner. The stock is up 1,200% since hitting lows early in the pandemic, and could have further upside if there's a sharp recovery in the gambling and entertainment business. But will it be a millionaire maker stock? 

Roulette wheel with a black background.

Image source: Getty Images.

The business of Caesars Entertainment

First, it's important to understand where Caesars stands financially. In mid-2020 Caesars loaded itself with debt to fund the merger with Eldorado Resorts. On Sept. 30, 2020, the company had net debt on the balance sheet of $13.2 billion, a heavy debt burden for a company that isn't currently making money. 

CZR Revenue (TTM) Chart

CZR Revenue (TTM) data by YCharts

We use EBITDA as a proxy for cash flow when discussing a casino company, and while the negative EBITDA number isn't likely to continue forever, investors need to see a big improvement for the business to be sustainable. Not only is EBITDA important to the company's operations, it is necessary to keep the company solvent. 

Casino companies normally have a maximum leverage ratio covenant -- calculated as net debt divided by adjusted EBITDA -- as part of their debt agreements. For example, Caesars' credit facility has a 6.35 to 1 leverage ratio, which means it will have to generate $2.1 billion in adjusted EBITDA to not be in violation of this covenant given current net debt. It's gotten a waiver from these covenants during the coronavirus pandemic, but you can see that Caesars will need a very significant recovery to maintain its current debt load.

Ultimately, debt is providing leverage that could send the stock sharply higher or lower depending on how operations play out. 

Acquiring William Hill

In October 2020, Caesars made another splash by announcing a 2.9 billion British pound acquisition of William Hill, the company's online gambling partner. To pay for the deal, Caesars sold another $1.9 billion in stock, rather than trying to add more debt. 

Online gambling is hot right now, and investors are betting this is what will make companies like Caesars into growth stocks. But online betting is still legal in only a handful of states, and it could take many years for this acquisition to really pay off financially. And that's a risk given the company's debt. 

Betting on a recovery

Where does Caesars stand as an investment today? This is a company that's all about leverage. It has lots of debt and lots of operating leverage in both the regular casino business and online gambling. If revenue picks up in the company's casinos later in 2021 and online gambling revenue continues to grow, this could be a huge winner for investors. But let's not forget about the downside risk. 

Caesars has a history of taking financial risks that haven't paid off, and that's why the debt is a risk. Remember, it was only 2017 that the company emerged from the bankruptcy of its largest operating unit. Now it's loaded up on debt, and after selling most of its real estate to REITs it has very few assets to fall back on if times get rough again.

This could be a millionaire maker stock if the gambling business enters boom times again, but I don't think the stock is worth the risk, and I'll place my bets on more conservative operators like MGM Resorts and Wynn Resorts long-term. 

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Stocks Mentioned

Caesars Entertainment Corporation Stock Quote
Caesars Entertainment Corporation
Wynn Resorts, Limited Stock Quote
Wynn Resorts, Limited
$59.51 (3.15%) $1.82
MGM Resorts International Stock Quote
MGM Resorts International
$29.88 (-0.50%) $0.15
Eldorado Resorts, Inc. Stock Quote
Eldorado Resorts, Inc.
$42.97 (-2.45%) $-1.08

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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