In the last article I wrote about Caesars Entertainment Corp (CZR), I pointed out that the company’s profits haves declined significantly, due to several factors like the licensing proliferation in the U.S. and the 2009 recession, which resulted in strong revenue declines throughout 2012. Furthermore, I was bearish about the casino’s ability to regain its financial strength, given its lack of free cash flow and immense debt load. With investment gurus like Paul Tudor Jones (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio) selling out or reducing their shares in the company, it seems as though not much has changed in the past months. But let’s take a look at the Apollo Global Management LLC (APO) controlled casino operator and see if there might be an upside anytime soon.
Is a New Acquisition Really a Good Idea?
After Caesars’ stock plummeted by 25% in March, hitting its lowest point since December, a consequence of management announcing its offer of 7 million common shares (worth $147.6 million), it looked as though the firm would lie back for some time until it regained strength. But to the contrary, last month’s closing of the casino in Tunica, Miss., and the 20% decline in revenue on the Las Vegas Strip properties, seem to have triggered the company’s ambition. In an effort to shift profitability towards a positive trend looking forward, the casino operator stated this week that it would be posting a $1 million bid, in order to acquire one of four available gambling licenses in New York. While Caesars is the only Nevada-based gambling firm to the bid so far, it will be competing against 15 other companies, like Foxwoods Resort Casino and Kuala Lumpur-based Genting Bhd. for the licenses.
The firm plans to build its New York gambling resort in Orange County, 50 miles outside of Manhattan, for $750 million, in an attempt to compete with Las Vegas Sands Corp. (LVS)’s venue outside of Bethlehem, Penn. Although a new casino could eventually increase revenue in the long term, my concerns regarding Caesar’s debt load remain strong, and I believe another purchase may hurt the company, instead of favor it. In fact, while fiscal 2013 lacked any sort of free cash flow, debt levels continue to rise, having increased from 2012’s $19.8 billion to a current $20.9 billion. This sort of leverage could be detrimental should another economic crisis occur, causing EBITDA margins to decrease by 20% or more, putting too much pressure on the already negative $2.2 billion EBITDA.
Look the Other Way
Despite some factors that could eventually contribute to the company’s profit, such as the recent passage of online gambling legislation in New Jersey, which will contribute $30 million to EBITDA by 2017, I remain bearish about Caesar’s long-term future. While the Las Vegas casino’s revenue will grow at a 4.1% CAGR and EBITDA will likely recover 330 basis points to 29.9% over the next decade, due to cost-cutting initiatives and a leveraging of fixed costs, I don’t see this casino operator as a profitable investment, given the maturity of the market.
Furthermore, earnings per share continue to fall at a strong pace, declining from 2012’s negative $12.04 to a current negative $22.9. In addition to this, returns on assets have also plummeted consistently over the past few years, falling from a positive 2.86% to a current -11.9%. All in all, I don’t see Caesar picking up on its profitability any time soon, so I would recommend investors to stay away from this casino operator for the time being.
Disclosure: Patricio Kehoe holds no position in any stocks mentioned.