Caesars Entertainment (NASDAQ:CZR), which releases its second-quarter 2014 earnings in early August, needs to show incredibly solid earnings in order to quell investors concerns surrounding the company's future. The company's first quarter saw casino revenue down over 8% year over year, and total income down over 50% during the same time. Needless to say, reporting a flat Q2 would be a major improvement especially in the face of competition from Las Vegas Sands (NYSE:LVS) and MGM Resorts International (NYSE:MGM).
Unfortunately, Caesars doesn't seem to have much hope this quarter. But don't write it off completely just yet -- there are a few points in Caesars' first-quarter earnings that might make this company a potential bet if Q2 shows some advancement in these areas.
Coming off of a cold Q1
In its Q1 earnings release, Caesar's blamed much of its hardship on cold weather in the U.S. during January and February. Unfortunately such statement appear to be more of the same especially with poor growth in the U.S. gaming sector since its peak before the 2008 financial crisis. Other companies, including Las Vegas Sands and MGM Resorts, have also had trouble turning a profit in the U.S. Still, Caesar's was the worst performer of the group even when only U.S. properties are considered for the other two. Here were some highlights:
- 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
Still, during the earnings call, Caesars Entertainment CEO Gary Loveman said, "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."
Two positive trends to look for in Q2
1. Debt reduction
The company is making headway in its attempts to restructure and pay down its vast debt load. Last year, the company announced that it would work on financial restructuring. The company had $27 billion of debt one year ago, and its debt load at Q1 sat at around $24 billion with current liabilities excluded. During Q2, the company announced plans for deleveraging that should help long term.
2. Increased revenue on non-casino operations
In Q1, Caesar's 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. If the company can continue to grow revenue in these non-casino segments, it will help to provide more positive net income when gaming picks up in the U.S. over the next few years.
A Vegas Comeback?
Caesar's Entertainment, with no significant international holdings, is essentially a bet on the U.S. casino market, particularly Las Vegas. While Las Vegas seems to be picking up this year, and shows signs of more growth over the next few years to the highs it saw before the financial crisis of 2008, Caesar's may have a hard time being the company to gain on that growth with tough competition in the city.
MGM Resorts is one company that looks to be a better bet to take advantage of Las Vegas's comeback, with less risk as the company still gets 37% of its global revenue from Macau. MGM Resorts grew faster than the industry in Las Vegas in 2013 and the trend is likely to continue this year. Higher room rates and cost efficiencies have led to incremental margins of more than 60% for MGM in Las Vegas last year. With more growth prospects in Las Vegas, and less risk of betting only on Vegas with supplemental Macau revenue, MGM Resorts is a much better play on this than Caesar's.
Another major competitor sure to drain gains from Caesars Entertainment over the next few years is Genting Group, a Malaysian gaming and resort conglomerate . This Malaysian company that runs Resorts World casinos in Malaysia, Singapore, and soon other Asian countries, has been rapidly expanding in Asia and the United States. In fact, Genting already runs a gambling operation in New York City with Resorts World New York, and boasts the highest-grossing U.S. slot machine parlor. Needless to say, U.S. investors should closely follow the company's coming development in Las Vegas as a competitor to companies betting on the Vegas comeback.
The beautiful Asian-themed resort plans for 3,000 hotel rooms, a mega casino with over 3,500 slot machines and table games, and a 4,000-person theater. It will also include an elaborate garden, one of the largest aquariums in the world, potentially a live-panda exhibit, and a 674 foot tall rooftop observatory that required the company to get permission from the Federal Aviation Administration.
Asian gaming growth is the name of the game
Las Vegas Sands, with Q1 2014 revenue coming in at a record $4.01 billion, a 21% year over year gain, is the kind of company investors should be betting on. The reason why Las Vegas Sands has had so much more success than Caesars has is primarily Asia, as the company generates 88% of its global revenue from Macau and Singapore. Caesar's is not benefiting at all from the vastly expanding Asian gaming market.
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 very end. Now Caesar's is fighting hard for its next chance at a casino in South Korea, and the company already has preliminary approval for a resort there.
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. Caesars met with Osaka officials late last year to discuss plans for investment in Japan, if allowed, which included talks with local potential partners.
The first quarter was a tough one for Caesars Entertainment and given its competitive position shareholders should expect to still see pretty gloomy results this time around as well. Two things that may pop up in the report that may mean the company is on the mend is Caesars making big strides on decreasing its huge debt load through its de-leveraging program, and to see hospitality and non-casino revenue to continue growing. Both of these points being said, Foolish long term investors would likely be better served by considering Caesar's competitors Las Vegas Sands and MGM Resorts International for the time being.
Bradley Seth McNew owns shares of Las Vegas Sands. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.