Caesars in Las Vegas Photo: Caesars Entertainment
Caesars Entertainment (CZR +0.00%), which released its first-quarter 2014 earnings on May 7, is not looking so good. With casino revenue down over 8% compared to the first quarter of 2013, which caused the company's total income to drop over 50%, it seems to be a losing bet for investors. While competitors such as Las Vegas Sands (LVS +2.60%) and Wynn Resorts (WYNN 0.90%) have posted massive gains recently, Caesars doesn't seem to have much hope. However, don't write it off completely just yet -- there is one point in Caesars' first-quarter earnings that might make this company a potential bet.
The highlights from Caesars Entertainment's earnings:
- Casino revenue down 8.5% year-over-year
- Net revenue for the company down 1.9% year-over-year
- Income down over 50% year-over-year
- Revenue from hospitality up, providing some relief for the casino decline
- Announced plans for stock listing and "significant deleveraging"
During the earnings call, Caesars Entertainment CEO Gary Loveman said that "Strategic investments in Las Vegas over the last few years are beginning to bear fruit... As additional assets come on-line later this year and into 2015, we are excited about Caesars' prospects in Las Vegas." Unfortunately, he also claimed that bad weather led to declined visitation in Q1, which negatively affected the company. I'm sure I'm not the only investors tired of hearing "bad weather" as a catch-all excuse for poor operations. But read on Foolish investors, there may be a nugget of gold in these earnings yet.
The only major casino company posting a loss
Net revenue for Caesars Entertainment declined 1.9% in comparison with the year-ago period. The company mainly attributed the loss to the 8.9% decrease in casino revenue. However, it saw some relief in revenues thanks to gains in both hotel and hospitality services, where room revenue jumped over 10% despite a flat occupancy rate, and a small bump from the social and mobile gaming operations that the company runs.
What is really troubling for the company is that its income dropped over 50%. Compare this to the results of Las Vegas Sands, which led the field with first-quarter 2014 revenue of a record $4.01 billion, up over 21% year-over-year, and nearly 50% EBITDA growth. The reason why Las Vegas Sands had so much more success than Caesars did is primarily Asia, as the company generates 88% of its global revenue from Macau and Singapore. Wynn Resorts gets 75% of its revenue from Macau, and subsequently also posted a revenue increase of nearly 10% year-over-year.
Caesars is still the industry leader... in the amount of debt it holds
Caesars Entertainment has had the highest debt load in the industry for a long time. However, the company is making headway in its attempts to restructure and pay down this debt. Last year, the company announced that it would work with Lazard Ltd, an investment bank, on financial restructuring. The company had $27 billion of debt one year ago, and its debt load currently sits at around $24 billion with current liabilities excluded.
However, Caesars is continuing to take action. Last week, the company announced an action to position its subsidiary, Caesars Entertainment Operating Co., for a stock listing. The sale of 5% of CEOC's equity to institutional investors is a good start. Loveman said that "When completed, today's actions will remove all of CEOC's 2015 maturities so that CEOC will have no significant maturities until 2016, and we intend to now turn our attention to extending the 2016 and 2017 maturities." This kicks the ball down the road a little, but is it enough to open up expansion opportunities?
Caesar Entertainment CEO Loveman has let the company's debt get out of control, limiting its expansion opportunities. Photo: ReviewJournal
Could this "significant deleveraging" mean more opportunities for Caesars?
In 2012, Caesars sought to enter the South Korean market, following the government's decision to finally allow casinos to operate in the country. Most analysts expected the bid to be a sure win. Unexpectedly, the South Korean government declined the bid at the last minute in summer of 2013.
Analysts close to the matter agreed that the likely reason was the company's huge debt load. This spurred the company's decision to sell its Macau property (which was not operating a gaming business anyway) to pay down some of its long-term debt.
Macau's massive and growing skyline. Photo: ChinaTourAdvisors
With a denied bid in South Korea and then the sale of its only property in Macau, the company now has no Asian holdings. While Las Vegas Sands and Wynn Resorts are reaping huge rewards from Asian gaming, Caesars was left with the excuse of "adverse weather" as a reason for a 50% decline in income. CEO Loveman has said that not entering Macau was the worst mistake the casino has ever made.
The one thing that could make me want to bet on Caesars Entertainment: Asian Expansion
Things may start to pick up again. As the company continues to fight to get its debt down, there was one nugget of hope in Caesars' earnings call that could indicate a major boon in the coming years:
"We are also looking forward to developing an integrated resort in South Korea with our partners there, a promising market given its proximity to China."
If Caesars really can get back into the running for an Asian casino, this could be the start of a turnaround in the company's prospects. A resort in South Korea, which on its own would be mildly exciting, could also mean more opportunity for expansion into Japan, which should get investors really excited.
Japan is said to be the next gaming growth market, which will beat out Singapore to become the second-largest gambling site in the world behind Macau. While casinos remain forbidden in the country, the government will vote on legislation in the coming months on whether casinos can begin building in Japan. Nearly all analysts expect that the vote will pass. In fact, casinos companies are already talking with officials in Japan as they prepare plans for their bids.
Caesars met with Osaka officials late last year to discuss plans for investment in Japan, if allowed, which included talks with local potential partners such as gaming machine makers Konami and Sega Sammy Holdings. However, Caesars is not the only one preparing to bid. Las Vegas Sands CEO Sheldon Adelson has already said that he would invest as much as $10 billion to win a bid in Japan if needed. Other companies, such as Wynn Resorts, are also preparing to fight for a spot.
Foolish Takeaway: Is this one nugget of hope enough to make a bet?
This has been a tough quarter for Caesars Entertainment, regardless of the poor weather conditions. With no significant international holdings, the company's huge income decline provides evidence that it did not make the bet that it should have on Asia, a bet that is spurring Las Vegas Sands and Wynn Resorts to record-setting revenues.
However, because the stock has been so beat up because of its lackluster performance over the last few years, one game-changing event, such as the company finally getting an Asian presence, could be just the kind of thing that could give long-term holders a nice return. That is, if this kind of event comes to fruition. The Japanese gaming market is ready for big profits, but Caesars will still have to prove itself to get a spot in Japan. With tough competitors also vying for spots, this might still be a bet with very low odds.
