Some growth is better than no growth
While Strip competitors Las Vegas Sands
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
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:
- The $19.8 billion debt load is like an anchor that will slowly bring the company down.
- 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.
- 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.