With the success of companies like Las Vegas Sands (NYSE:LVS) and MGM Resorts International (NYSE:MGM) over the past few years, and trends that support evidence of even more growth to come for these casino companies, the gaming industry looks like a good bet over the long term. However, Caesars Entertainment (NASDAQ:CZR) is not one of the companies with good future prospects, and, in fact, it looks like it might be in serious financial trouble with rapidly falling income and crushing debt.
The last few years have been a constant struggle for Caesars, and the last few quarters especially continue to prove that the company just isn't capable of turning things around. First-quarter income being down more than 50% year over year was disheartening enough for Caesars investors, especially because during that same time, Las Vegas Sands posted record earnings up more than 36% year over year. Q2 wasn't much better for Caesars, with reported income from operations down 20% from the same period of 2013. Coming up on Q3, things once again don't look good for this gaming company.
Why is Caesars struggling so much?
The whole U.S. gaming economy has struggled to regain what was lost when the 2008 financial crisis hit leisure companies especially hard. MGM Resorts and Las Vegas Sands have also struggled to make a profit in U.S. until this summer. Yet there are two main reasons other gaming companies are continuing to do well while Caesars is not.
1. No meaningful international operations
While the U.S. gaming economy was tanking during the 2008 financial crisis, and gaming companies focused on Las Vegas were reporting huge losses, companies such as Las Vegas Sands that had more of their operations in international locations were making more profits than ever. Properties in Asia have helped Las Vegas Sands to post incredible profit growth over the last few years, and this diversification among regions has helped to smooth out troubled times.
Caesars Entertainment did try to build casinos in Macau and South Korea, but was unsuccessful in each place. Caesars did have property in Macau at one time, but without a gaming license from the local government and little cash reserves to build a competitive resort there, the company really just had an expensive plot of land.
Caesars then tried to enter the South Korean market in 2012 and expected the bid to go through. Suddenly in 2013, the South Korean government decided to deny the bid. Following the denied South Korean bid, the company then sold its Macau property to raise much-needed cash, and soon thereafter, also sold most of its final international locations in the U.K. and elsewhere.
Without any meaningful international holdings, Caesars is a bet on the U.S. market alone. Las Vegas gross gaming and non-gaming revenues have been increasing steadily so far this year, and there are signs of more growth to come from Sin City over the next few years. Still, Caesars will have a hard time being the company to gain on this Las Vegas growth with competition from the likes of MGM Resorts and Genting. MGM is one of the companies with the most to gain on Las Vegas' comeback, with more than 10 properties in the city and quickly expanding profit margins. Genting, the Malaysian gaming company that runs Resorts Worlds casinos around the world, is also building its new $4 billion Resorts World Las Vegas that will be sure to make it even harder for Caesars to turn a profit in Las Vegas.
2. Crushing debt load
While the South Korean government didn't officially release reasons for the denied bid, most analysts agree Caesars' ridiculously high debt load was the reason South Korean officials lost confidence in the company's ability to develop in the country long-term.
The company had $27 billion of debt at the time. Its debt load at the start of this year dropped to $24 billion (with current liabilities excluded) as the company continues to restructure its debt, pass some of it down to subsidiary companies, and work with creditors. But even though the debt load has decreased slightly, the company still has a long way to go.
As of right now, Caesars has some of the highest debt in the industry, with little to show for it. While some of Las Vegas Sands' and MGM's new resorts in Macau are being financed through debt, these companies have a lot of growth potential to show for taking on this debt.
Foolish takeaway: Is there any hope for Caesars Entertainment?
Building an international presence could help to pull Caesars back from its current woes. Management has actually made announcements this year of continued talks with the South Korean government, as well as plans to build in the Philippines. However, with Caesars' current international track record, it would be wise to wait and see if any of this talk turns into operating casinos before using it as a reason to believe the company can start to increase revenues and profits.
Also, the company would need some vast financial restructuring. Caesars management does seem to be focused on restructuring its debt and working with creditors. Still, until there is a reason to believe the company can increase cash enough to reduce this debt significantly, this is not very encouraging by itself. With revenues continuing to drop each quarter, the company running out of properties to sell in order to raise cash, and little hope for increasing revenue from U.S. operations alone, there doesn't seem to be much hope for Caesars Entertainment.
Bradley Seth McNew owns shares of Apple and Las Vegas Sands. The Motley Fool recommends Apple. The Motley Fool owns shares of Apple. The Motley Fool is short Caesars Entertainment. 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.