Market Mad House

In individuals, insanity is rare; but in groups, parties, nations and epochs, it is the rule. Friedrich Nietzsche

The Death Spiral

Caesars Entertainment and the Bizarre World of Gambling Stocks

  • Caesars Entertainment is posting numbers that seem to contradict each other.
  • Despite all of its problems, Caesars revenues rose over the last year.
  • Caesars’ mountain of debt and low stock price make it a possible value buy.
  • A number of casino operators with large Vegas properties including Las Vegas Sands, Wynn Resorts and Caesars have posted revenue growth over the past year.

Caesars Entertainment (NASDAQ: CZR) proves that gambling stocks are not for the faint of heart these days. The troubled casino operator has been reporting some bizarre and apparently contradictory numbers lately.

Strangely enough, Caesars’ TTM revenue does not look that bad; on June 30, 2014, the company reported a TTM revenue figure of $8.54 billion, up slightly from $8.47 billion in June 2013. Business seems to be increasing at Caesars despite all of its troubles.

  • The revenue is offset by some of Caesar’s other numbers:
  • A diluted earnings per share ratio of -24.99%
  • A net income of -$3.371 billion
  • A profit margin of -21.34%
  • A debt to equity ratio of -7.948
  • A free cash flow of -$588.10 million.

There is one other number that looks very good from an investors’ standpoint. Caesars reported a return on equity of 139.1% on June 30, 2014. That number and the revenue make Caesars attractive because it is cheap; shares were trading at $11.71 on October 17, 2014.


Caesars is made all the more attractive by the numbers reported by some other gaming giants. Wynn Resorts (NASDAQ: WYNN) reported a TTM revenue of $5.846 billion on June 30, 2014, up from $5.299 billion in June 2013. Wynn also reported a diluted earnings per share of 8.107, a net income of $826.7 million, a profit margin of 14.44%, and a free cash flow of $131.34 million. It also reported a return on equity of -1283%, probably the result of a $182.45 share price on October 17, 2014.

Is Caesars a Classic Value Opportunity?

What does all this prove besides the fact that gambling stocks are bizarre? Well, contrarians and value investors might see Caesars as an opportunity because it is cheap and it makes money. More importantly, the company is in trouble and generating a lot of bad press.

The company is trying to restructure $18.3 billion in debt and contemplating bankruptcy, Bloomberg reported. It is also facing a catastrophic deadline on December 15. That’s the day that $225 million in interest payments on $4.5 billion worth of second-lien notes are due.


The terms of the loan give Caesars a 30-day grace period to pay off that debt. If it cannot pay off the loans, the company would have to file for Chapter 11 bankruptcy by January 15, 2015. Caesars is trying to avoid a total crash by negotiating with bondholders for a restructuring.

So is Caesars a value buy? After all, it does meet some of the Ben Graham criteria; it has a low share price, but it makes a lot of money. The company could be profitable if it were able to shed money losing assets. That process has already begun; Caesars shut down its Showboat casino in Atlantic City on Aug. 31. It also pulled the plug on its operations in Tunica, Mississippi.

Do Revenues Make Caesars a Contrarian Play?

Caesars is also something of a contrarian play because it is in a very troubled industry: casinos. The prevailing wisdom is that there are too many casinos in the U.S. competing for a shrinking pool of gamblers. Yet some casino operators have posted gains in revenue in the last year.

In addition to Wynn, MGM Resorts International (NYSE: MGM) saw its TTM revenue rise from $9.383 billion in June 2013 to $10.19 billion in June 2014. Las Vegas Sands (NYSE: LVS) reported that its revenue rose from $12.33 billion in June 2013 to $14.82 billion in June 2014.


Another operator, Penn National Gaming (NASDAQ: PENN), saw its revenue tumble. Penn reported a TTM revenue of $3.101 billion in June 2013 that fell $2.65 billion in June 2014. Penn National operates region casinos and race tracks around the United States, mostly under the Hollywood Casino brand. Regional casinos are suffering because too many new gambling houses have opened in the heartland.

 The revenue numbers show that it is still possible to make a lot of money in the casino business. They also indicate that the industry’s future is in high-end resorts in destinations such as Las Vegas and Macau, not regional casinos like those in Atlantic City.

Caesars is well positioned to take advantage of that transition. It has an impressive stable of Las Vegas destinations, including Caesars Palace, the Flamingo, Planet Hollywood, Paris Las Vegas, and the Cromwell. If the company can be restructured to focus on those properties, it should be a money maker. If you are willing to take a risk, Caesars Entertainment could be a fun contrarian play.