The casinos and resorts industry in the U.S. has faced challenging times over the last few years due to a variety of factors, which include the encroachment of both legal and illegal online gambling platforms, increased debt and a growing rivalry that has seen some players forge partnerships with overseas companies.
Caesars Entertainment (CZR, Financial), which was once one of the leading gambling companies in the U.S., has faced the full force of this paradigm shift, and its efforts to explore online gambling opportunities via Caesars Interactive Gaming business has failed to match the achievements of its European counterparts.
The company is currently in the process of executing a reorganization plan which involves selling its bankrupt operating unit.
Business overview
Caesars Entertainment Corporation (CEC) is composed of two entities: Caesars Entertainment and Caesars Acquisition Company (CACQ). CZR, which makes up 58% of the overall business, is further composed of two business units: Caesars Entertainment Operating Unit and Caesars Entertainment Resort Properties.
CEOC is CZR’s largest business unit, and also the one that is being sold. This unit has been underperforming in recent quarters when compared to CEC. CEOC generates revenues from three main business units including Casinos, which accounts for more than 55% (net of casino promotional allowances) of net revenues, Food and Beverage and Rooms.
CEOC revenues Q2 2015 and H1 2015 via company presentations
Looking at the performances of the CEC continuing operations (excluding CEOC), investors have a reason to smile because this segment posted the best adjusted EBITDA margins in a long time. The figure for the overall business, however, was pulled back by the low margin posted in CEOC unit.
CEC vs CEC and CEOC Q2 2015 via company presentations
Caesars appears to be in a strong position without the struggling CEOC unit, but until it gets rid of it along with the majority of the debt, investors will remain coy. Without CEOC, CEC will be a lean business model focusing primarily on hospitality properties and entertainment.
The company has cited local rivalry as one of the biggest challenges to its CEOC business, but international competitors cannot be ignored because it has a presence in Europe, Africa, North America and South America.
This means that in the frame of gambling as a business, the company also faces rivalry from European stalwarts such as Betfair, William Hill, Ladbrokes and Paddy Power. For more information on potential global rivals to Caesars Entertainment, visit here.
Is Caesars Entertainment a risky investment?
When you look at the company’s performances, the price of the stock has been significantly volatile over the last 12 months. In the last six to seven months, shares of Caesars Entertainment have traded at a low of about $4.76 and a high of about $12.50. This represents massive price volatility over a short period, making it very tricky for investors.
However, investors can draw some optimism from the fact that since the beginning of this month, shares of Caesars have remained relatively stable, though thinly traded.
The stock currently trades at about 0.24 in P/E ratio for the trailing 12-month period compared to industry average of about 19.59x. The $8.10 per share also prices the company’s stock at 0.64x in PB value, which means that the market values it less than its liquidation amount.
Low P/B ratio is one of the recommended investing strategies to explore at GuruFocus, and given Caesars' 0.64x valuation, investors may jump into buying the stock before examining the inner details. When a company is financially distressed as is the case of Caesars, a below book value market valuation could be the first signal that the stock is likely to be a value trap.
Therefore, it is important to assess whether the company is in a good position to get out of the current situation. For instance, Caesars has a plan in place to get out of debt.
However, as per recent reports, that plan appears to have hit a snag following the lack of bids for the sale of one of its operating units, a property at Harrah's Tunica Casino in Mississippi. The company filed for Chapter 11 bankruptcy in February and had been trying to divest its investment in Tunica for two years, before eventually shutting doors.
Caesars Entertainment is selling its operating unit, COEC, which consists of 38 casinos including Caesars Palace Las Vegas as it seeks to get out of the $18 billion bankruptcy. However, some are questioning the company’s commitment to the plan and are skeptical on whether it will be able to implement the process.
As such, it would be worth keeping a close eye on the developments on the restructuring plan to establish whether the company is still on track to reach its goal. When the path opens clear, then CEC excluding CEOC will be an interesting investment opportunity for investors looking to buy the turnaround plan, and one of the best ways of doing this will be via CZR.
Conclusion
The bottom line is that at this time, Caesars Entertainment remains a tricky investment. However, the plans are in place and all that is required is for the company to establish clear action plans that do not draw skepticism from investors.
Caesars has been accused of leaving out key assets, including a crucial piece of its big-data customer loyalty program out of the CEOC sale package. When you add this issue to the recent auction cancellation, there are genuine question marks about the process.
At this moment, investors should stay out of CZR, but keep an eye on how things develop, because once the path is clear, it could turn out to be a very good investment opportunity.
