The decline of Caesars Entertainment Corp.'s (CZR, Financial) stock price over the last year presents an investment opportunity. The company has been hurt by a slowdown in growth in Las Vegas, but changes to sports betting regulations could act as a catalyst on its stock price.
The company is seeking to increase its growth in non-gaming markets through a brand licensing business. It also has the potential to gain a gambling license in Japan over the long term. This could provide access to what may become one of the largest gaming markets in the world.
While it has underperformed the S&P 500 in recent months, falling 12% in the last year versus a 16% rise for the index, the turnaround prospects for the stock seem to be high.
Sports betting opportunity
The Supreme Court’s decision earlier this year to allow sports betting across the U.S. could act as a catalyst on the gaming sector. According to the American Gaming Association, the sports betting industry is currently worth around $150 billion per year. Much of this takes place underground, but following its legalization could be an area that Caesars Entertainment is able to exert a dominant position in.
The company recently launched sports betting in Mississippi. It also has a presence in 13 states, so could quickly roll out sports betting across the U.S. as it becomes more widely available to consumers. In an industry with slimmer margins than traditional games such as slots, the first-mover advantage could be crucial. It may mean a small number of companies gain large market shares and become the main beneficiaries of the growing industry.
Sports betting will also allow Caesars Entertainment to increase its customer engagement levels. Current marketing communications provide limited opportunities to engage with customers when they are not in a casino. Online sports betting could allow casinos to increase brand awareness among existing and potential customers. It may also make gambling available to a wider audience.
Strategy change
Alongside its core operations in the gaming arena, Caesars Entertainment is seeking to increase its growth in non-gaming markets. For example, it launched a brand licensing business which is aiming to bring its hotel brands to new and existing markets across the globe. This could increase brand awareness and bring new customers to its loyalty program. Through this channel, the company has scope to incentivize members to visit its casinos in the future.
Licensing its brand is a capital-light means of boosting revenue. Minimal investment requirements mean the financial risk to the company is relatively low. It may also enable a relatively fast expansion of the brand in new markets such as the Middle East. This could help to encourage customers from non-gaming markets to use its casinos when visiting the U.S.
Potential threats
With around 47% of Caesars Entertainment’s revenue being derived from Las Vegas, the company is being hurt by a slowing growth rate in the world’s second-largest gaming market. Compared to some of its sector rivals, it lacks international diversification. It may, therefore, be more susceptible to a slowdown than its peers. In the third quarter, the company expects revenue per available room in its Las Vegas properties to be flat to 2% higher versus the prior-year quarter. This would be down from growth of 3.5% recorded in the second quarter of the year.
While stock price volatility could be high in the near term if growth figures disappoint, Caesars Entertainment generates around 46% of its revenue from elsewhere in the U.S. This could help to offset a slowdown in Las Vegas as well as provide growth opportunities, such as through sportsbooks, in the medium term. The company also has an opportunity to gain one of three gaming licenses in Japan. They will each provide near-monopoly status in a specific Japanese city, with the country having the potential to become the second-biggest gaming market in the world.
Outlook
Although Caesars Entertainment has disappointed in recent months, it offers recovery potential. It could become a dominant operator in the lucrative sports betting segment. This could not only increase revenue and profitability, but allow for greater customer engagement.
Diversifying the company’s operations into brand licensing could improve brand awareness. The potential for operations in Japan to be established over the long run may also help to reduce its reliance on Las Vegas.
Therefore, after a year of underperformance versus the S&P 500, the stock could have turnaround potential over the long term.
