Caesars' Balance Sheet Is Improving and Demand in Vegas Is Remaining Resilient

Senior Equity Analyst

Dan Wasiolek

Revenue segments as reported by the company.

Casino and pari-mutuel commissions

Food and beverage

Hotel

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As a result of the acquisition of the legacy Caesars business by Eldorado (closed July 2020) and its leading omnichannel presence, we estimate Caesars holds around a high-teens revenue share of the $60 billion domestic commercial casino gaming market. The acquisition roughly doubled the company’s U.S. portfolio to about 50 properties while lifting its loyalty membership to over 60 million from 55 million. Caesars has realized over $1 billion in combined sales and cost synergies from its merger with Eldorado, representing around a 30% increase to pro forma 2019 EBITDAR. Before this recent combination, legacy Eldorado successfully integrated the Isle and Tropicana acquisitions in 2017 and 2018, respectively, with both deals driving about a 30% return on investment, based on our calculation.

Despite this successful acquisition record, we don't believe Las Vegas and other U.S. gaming regions contribute to a moat for Caesars. U.S. gaming demand is lower than in Asian regions like Macao and Singapore, where the propensity to gamble is much higher. Also, the 1,000 commercial and tribal casinos in the U.S. serve a total population of 334 million, well in excess of the 36 and 2 casinos found in Macao and Singapore, respectively, with Chinese and Singaporean populations of 1.4 billion and 5.6 million, respectively. Further, supply growth in U.S. gaming is increasing in 2024, with an opening in Las Vegas that adds a low-single-digit percentage to market room supply. This compares with negligible additions in either Macao or Singapore, where we see no additional licenses for the foreseeable future.

That said, Caesars is positioned to benefit from the multi-billion-dollar sports betting and iGaming market. Caesars plans to invest around $1.1 billion in its digital assets into 2023, after which the business is expected to start generating profits on an enduring basis. We forecast for 15% of the company's total sales to be generated from online gaming by 2027.

Finally, we think its more than $3 billion in liquidity (at the end of 2022) and $6.9 billion in free cash flow generation through 2027, position it to service the $11 billion in debt scheduled to mature in 2024-27.

Business Strategy & Outlook

Despite management’s record of value-enhancing acquisitions (namely Isle in 2017 and Tropicana/Elgin in 2018), we don’t believe Caesars Entertainment, which is majority owned and operated by former Eldorado management after its acquisition of the company in July 2020, has an economic moat due to its outsize exposure in Las Vegas (58% of 2022 EBITDA, before corporate) and U.S. regional markets (59%) where regulatory barriers are low; the digital segment produced negative EBITDAR in 2022. As a result of the competitive gaming markets it competes in, Caesars’ 6.4% return on invested capital including goodwill on average the past three prepandemic years (2017-19) sits below its 9% weighted average cost of capital, supporting our stance that it has failed to carve out an edge.

Caesars’ casino property portfolio has grown to around 50 properties from just 4 in 2014, as the company has excelled at identifying and integrating acquisitions that generate both strategic and economic value for shareholders. To illustrate, Eldorado’s acquisition of Isle (closed May 2017) lifted the company’s casino portfolio to 20 properties from 7, with minimal geographical overlap, supporting the strategic value of the deal. Also, while Eldorado acquired Isle for a fair 8.8 times trailing 12-month EBITDA (in line with the roughly 8-11 times TTM EBITDA range investors valued U.S. regional gaming companies Eldorado and Penn National Gaming during 2015-19), the deal becomes attractive at 6.3 times including achieved synergies. Eldorado was able to integrate its decentralized business model, which aided in reducing Isle’s corporate and property-level (marketing and labor) cost structure; this allows individual casino property managers autonomy to customize offerings relevant to local markets. For instance, we find that Isle was spending over 20% of its net revenue on marketing and administration versus the just 5% of net sales Eldorado was spending on marketing and promotions. As a result, Eldorado increased Isle’s EBITDA 35% to $270 million at year-end 2018 from roughly $200 million at the time of the deal’s closure in May 2017. Valuing the $70 million in synergies at an 8 times multiple equates to $560 million in value creation, or a 32% return on the $1.73 billion acquisition price.

Using Isle synergies and consolidated free cash free to work down leverage, Eldorado soon was able to take on its next large acquisition in Tropicana/Elgin, which closed in the fourth quarter of 2018. Tropicana/Elgin took Eldorado to a portfolio of 26 gaming properties from 18 and again presented the consolidated company with minimal geographical overlap, offering strategic rationale to consummate the deal. While Eldorado acquired Tropicana/Elgin for a quite reasonable 7 times TTM EBITDA, the deal looks increasingly attractive at 5.8 times TTM EBITDA, once including the $55 million in achieved corporate and property-level synergies (which we calculate equates to 25% of the roughly $220 million in TTM EBITDA at the time of the acquisition) achieved during the first year. Valuing the $55 million in synergies at an 8 times multiple equates to $440 million in value creation, or a 29% return on the $1.54 billion combined acquisition price.

Overall, we can see that acquisition synergies from integrating Eldorado’s decentralized operating model have aided its consolidated EBITDA margin, which expanded to an estimated 27.6% in 2019 (we estimate margins were around 22% excluding these synergies) from 18.7% in 2016 (pre-Isle/Tropicana/Elgin acquisitions).

Beyond the synergistic value creation, the Isle and Tropicana/Elgin deals, along with the Caesars acquisition, have meaningfully increased the company's presence in the U.S. gaming market. To illustrate, we calculate that Eldorado’s gaming revenue share of the total (including tribal operators and commercial) U.S. gaming market was above 10% in the prepandemic year of 2019, up from less than 1% in 2014. 

As the portfolio has grown, so has the loyalty program, which stands at more than 60 million members, compared with no-moat peer MGM’s roughly 40 million M Life individuals. This loyalty presence should offer the potential to leverage data analytics and cross-sell Caesars' growing portfolio, leading to incremental revenue generation. In fact, stand-alone Caesars had claimed that its loyalty program provides around a 10% revenue and EBITDA bump for assets entering its program.The power of the loyalty program is also buoyed by specific property examples, such as Caesars' sale of Harrah's St. Louis in 2012 to Penn, as in the years following the sale the properties prior share gains turned to share losses. Another specific example is the company’s Centaur acquisition (closed July 2018 in Indiana), which saw midteens to 20% EBITDA growth, despite this asset continuing to face competition from other racing operators (a racetrack with gaming slots).

Although we believe Eldorado’s acquisitions have added shareholder value and some support for a brand intangible asset advantage, this is overshadowed by competitive barriers in the U.S. gaming industry that are too low to warrant a moat for the company. Due to lower gaming barriers, the U.S. gaming market has more supply than its Asian counterparts. This is illustrated in America's roughly 1,000 commercial and tribal casinos, compared with just 2 and 36 casinos in Singapore and Macao, respectively. This regional casino supply results in one U.S. casino for every 334,000 people versus 2.8 million and 39 million Singaporean and Chinese citizens per Singapore and Macao gaming property, respectively. 

Further, we do not expect additional gaming licenses in the foreseeable future in either Singapore or Macao, while there has been accelerated legalization of gaming in the U.S. casino industry over the past 10-20 years. Today, more than 30 states offer commercial gaming with the vast majority added since 1990 (around 15 added since 2000). Gaming was legalized in Las Vegas in 1931 and it wasn't until 1976 when Atlantic City allowed gaming, offering the first real competitive option in the U.S. Then it wasn’t until the 1990s that several states legalized gaming. Pennsylvania and Maryland approved slots in 2004 and 2008, respectively, followed by these states then allowing gaming tables in 2010 and 2012, respectively, which increases competition for Caesars’ properties located in and around those two states. U.S. gaming competition has been elevated further in the Northeast with Rhode Island approving gaming in 2000, with its first casino opening in 2007, and Massachusetts (after many failed attempts) and New York legalizing gaming in 2011 and 2013, respectively, with casinos there just beginning to open during the past few years. Arkansas legalized gambling in 2018, awarding four gaming licenses, which presents competition for Caesars’ properties in the neighboring states of Louisiana, Mississippi, and Missouri.

Existing states also continue to expand supply, thereby increasing competition. For instance, Mississippi is one of many states to have no statutory limit on the number of licenses (Colorado, Iowa, Mississippi, Nevada, and South Dakota are the others). As of March 2022, Mississippi had 30 commercial casinos (up from 26 in mid-2022), ranking only behind Nevada’s 215 and Colorado’s 33 establishments. Legacy Caesars’ Tunica Roadhouse casino in Memphis saw around a 250,000 decline in visitors to the property during 2013-17, dropping to the 14th most attended attraction in the city in 2017 from the 9th most visited in the area in 2013, according to Memphis Business Journal. In the face of this competition in Mississippi, as well as new openings set to occur in the neighboring state of Arkansas, Caesars closed its Tunica resort in 2019.

Not only is U.S casino supply more plentiful relative to Asian gaming markets, but demand is also lower in the former. This is illustrated by a higher propensity to gamble (the demand side of the equation) in Asian markets, where gaming revenue as a percentage of country GDP is more than twice that seen in the U.S. To illustrate, we calculate the Asian gaming market (Singapore and China) generates revenue amounting to around 80-90 basis points of its total GDP versus around 40 basis points for the U.S.

That said, we are constructive on the opportunity of U.S. sports wagering, as we expect the current 30-plus states and District of Columbia that have legalized betting to expand to 40 states through 2025, leading to a multi-billion-dollar revenue industry. We expect Caesars' domestic properties to participate in this opportunity.

As a result of supply expansion and lower propensity to gamble, U.S. casinos achieve around single-digit ROIC versus Singapore and Macao integrated resort operations that garner around a low-double-digit ROIC, supporting our no-moat rating for Caesars.

None

Economic Moat

Caesars Entertainment

Caesars Entertainment, Inc. engages in the management of casinos and resorts under the Caesars, Harrah's, Horseshoe, and Eldorado brands. It operates through the following segments: West, Midwest, South, East, and Central. The West segment consists of gaming and hotel properties in Nevada and Colorado. The Midwest segment includes dockside casinos in Iowa and land-based casinos in Missouri. The South segment manages dockside casinos in Louisiana and Mississippi, a land-based casino in Mississippi, and a racino in Florida. The East segment consists of a racino in Ohio and a casino in New Jersey. The Central segment manages casinos in Indiana, Illinois, and Missouri. The company was founded in 1937 and is headquartered in Reno, NV.

Earnings data Q2 2023

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Caesars Entertainment, Inc. engages in the management of casinos and resorts under the Caesars, Harrah's, Horseshoe, and Eldorado brands. It operates through the following segments: Las Vegas, Regional, Caesars Digital, Managed and Branded, and Corporate and Other. The company was founded in 1937 and is headquartered in Reno, NV.

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