Caesars Entertainment (CZR): Positioned to Capitalize on U.S. Casino Gaming Market Growth

Introduction

Institutional Holdings and Market Performance

Institutional investors have shown significant interest in Caesars Entertainment, holding 91.79% of its stock. Notably, Price T Rowe Associates Inc. MD reduced its stake by 32.6%, now holding 289,315 shares worth approximately $12.65 million. This reduction, while notable, does not overshadow the overall strong institutional confidence in Caesars’ long-term prospects.

The stock recently traded at $35.66, down by $1.70, with a market capitalization of $7.71 billion. Despite a challenging earnings report, the stock’s 52-week range of $31.74 to $58.29 indicates potential for recovery and growth.

Financial Performance and Analyst Ratings

Earnings Results

For the quarter ending July 30, 2024, Caesars reported a loss of ($0.56) EPS, missing the consensus estimate of $0.12 by $0.68. Revenue was $2.83 billion, slightly below the expected $2.87 billion, marking a 1.7% decrease compared to the previous year. The company’s net loss of $122 million, compared to a net income of $920 million in the prior year, was primarily due to a $940 million release of a valuation allowance against deferred tax assets in the previous period.

Segment Performance

• Las Vegas Segment: Generated $1.1 billion in revenue, up 1.9% year-over-year, with record same-store revenues, hotel occupancy, and Average Daily Rate (ADR). Adjusted EBITDA from this segment was $514 million.
• Regional Segment: Reported revenues of $1.385 billion, down 5.2% year-over-year, facing competitive pressures in new markets.
• Caesars Digital Segment: Achieved a record Adjusted EBITDA of $40 million, up from $11 million in the prior year, indicating strong growth in digital operations.

Analyst Ratings

The stock has a consensus rating of “Moderate Buy” with an average price target of $54.14. Analyst ratings include:

• Raymond James: “strong-buy” with a $55.00 target
• Susquehanna: “negative” with a $33.00 target
• TD Cowen: “buy” with a reduced target of $50.00
• B. Riley: “buy” with a $70.00 target
• Truist Financial: “buy” with a reduced target of $52.00

These mixed ratings reflect cautious optimism, with several analysts maintaining buy ratings despite recent earnings challenges.

Market Dynamics and Growth Potential

U.S. Casino Gaming Market

The U.S. casino gaming market is forecasted to grow significantly, with commercial gaming revenue growth averaging 9.3% over the past six quarters. This growth is driven by increasing consumer demand for gambling, particularly in sports betting and iGaming. By 2027, it is anticipated that seven additional states will legalize sports betting, potentially reaching nearly 90% of the adult population. This expansion is projected to drive industry revenue from around $11 billion in 2023 to approximately $23 billion in 2027.

Global Market Trends

The global casinos and gambling market is estimated to grow by USD 132.17 billion from 2024 to 2028, with a compound annual growth rate (CAGR) of approximately 10.43%. The increasing popularity of online gambling and the use of social media marketing by casino operators are key drivers of this growth. Innovative technologies like augmented reality and cryptocurrency transactions are expected to enhance market growth further.

Competitive Landscape

Caesars Entertainment holds a market share of 9.83% in the overall Hotels & Tourism industry, with revenues totaling $11,391 million over the past twelve months. In the gaming market specifically, Caesars’ market share within the Services sector is 12.59%, showing a decrease from 13.26% in Q1 2024. It competes closely with companies like MGM Resorts (18.86%) and Marriott International (27.02%).

Economic Factors and Consumer Sentiment

Lower Borrowing Costs

The Federal Reserve’s potential interest rate cuts could reduce borrowing costs for consumers and businesses, including the casino industry. Lower borrowing costs can lead to increased consumer spending, as individuals may be more inclined to take out loans for discretionary spending, such as entertainment and gambling. This economic shift could positively influence Caesars’ financial performance and stock price.

Consumer Confidence

The Conference Board Consumer Confidence Index rose to 100.3 in July from 97.8 in June, indicating a slight improvement in overall consumer sentiment. However, concerns about rising prices and interest rates persist, affecting consumer spending behavior. Consumers reported plans to reduce spending on discretionary services, including gambling, favoring less expensive options such as streaming.

Inflation Concerns

Inflation expectations remain steady at 5.4% for the next 12 months, which may lead consumers to prioritize essential spending over discretionary entertainment like casino gaming. Lower-income consumers, in particular, are spending 72% of their income on basic needs, limiting their disposable income for entertainment activities.

Strategic Considerations for Investors

Operational Strengths

Caesars’ strong performance in Las Vegas and significant growth in its digital segment highlight its operational strengths. The company’s focus on strategic investments, such as the $430-million renovation of the Caesars New Orleans property and the opening of a permanent facility in Danville, VA, underscores its commitment to growth and market expansion.

Debt Reduction and Capital Expenditures

As of June 30, 2024, Caesars had $12.4 billion in total debt and $830 million in cash and cash equivalents. The company continues to focus on debt reduction, having made over $100 million in Term Loan B repayments during the quarter. The capital expenditure cycle is nearing completion, expected to reduce CapEx by over $500 million, enhancing free cash flow, which will be utilized for debt reduction.

Stock Buybacks

The question of when Caesars will initiate stock buybacks remains pertinent. Strong cash flow on the Las Vegas Strip and more stable operations compared to the past have led to improved performance in the stock market. Initiating stock buybacks could return capital to shareholders and potentially boost the stock price.

Conclusion

Caesars Entertainment is well-positioned to benefit from the projected growth in the U.S. casino gaming market, driven by sports betting and iGaming. Despite recent financial challenges, the company’s strong performance in Las Vegas and digital segments, coupled with strategic investments and a focus on debt reduction, highlight its potential for long-term growth. Lower borrowing costs and improved consumer sentiment could further enhance Caesars’ financial performance and stock price. For individual investors, Caesars presents a compelling opportunity, with a balanced view of potential risks and rewards in the evolving gaming market.