Caesars Entertainment, Inc.

Moat: 2/5

Understandability: 3/5

Balance Sheet Health: 2/5

Caesars Entertainment, Inc. is a gaming and entertainment company operating casinos, hotels, and related facilities across the United States and select international markets, primarily focused on providing a wide range of gaming and entertainment offerings.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Caesars Entertainment operates across multiple segments: Las Vegas, Regional, Caesars Digital, and Managed & Branded.

Business Overview

  • Las Vegas: This segment is their core business, with resorts like Caesars Palace, Planet Hollywood, and Harrah’s, among others. These properties offer a variety of gaming options, entertainment shows, dining, and luxury retail.
  • Regional: The regional segment consists of properties outside of Las Vegas, typically in other states across the US with more standard casino offerings. They cater more to a local market with the main focus being on slots.
  • Caesars Digital: This is the company’s online and mobile gaming platform, which includes sports betting and iGaming operations like the Caesars Sportsbook, and it is a quickly growing segment.
  • Managed & Branded: This segment encompasses properties they manage for other companies or under other brands.

Caesar’s business can be hard to understand fully, given that it has such a wide variety of properties and operates both in physical locations as well as through a rapidly evolving digital segment.

  • The gaming industry is highly competitive, with a mix of regional and national players.
  • Online gaming and sports betting is a rapidly growing segment within the gaming industry, with increased legalization and the increasing use of apps and online services.
  • There’s significant consolidation in the gaming sector, as companies seek to diversify and leverage scale advantages.
  • Regulation plays a critical role in the industry, and regulatory changes, tax policies, or new license rules have a significant impact.
  • Technological innovations affect game design and how operations are conducted.
  • Customers prefer diverse choices in entertainment and leisure options, including dining, live shows, and other non-gaming amenities.

According to recent reports, the company has 52 properties in 19 US states, and 5 overseas properties. It provides multiple ways for customers to engage with its brand, like physical locations and through online channels, which is very important for a business in today’s day and age.

Financial Analysis

  • The company’s most recent results are for the third quarter of 2023, which show total revenues of $2.9 billion (up by 1% year-over-year).
  • Their net revenue declined by 3.7% YOY to $2.65 billion. They reported a net loss of $180 million this quarter, however they did generate positive free cash flow.
  • Their adjusted EBITDA was $860 million this quarter, which has a good margin for the company
  • The regional gaming revenue has improved by 2.5% YOY but in Las Vegas has decreased by 4.7% YOY which is a cause for concern
  • Digital gaming is still growing YOY but the rate of growth is shrinking (although net revenue from digital segment increased by 22% in the last quarter YOY)
  • Their long-term debt continues to decrease and was $12.6 billion in the recent report, but it still remains high, making it an important area of focus.

The company is heavily leveraged, but has steadily decreased its debt over the last couple of years.

  • Historical Performance: While some segments of the business have had a successful growth, it does appear that there are large inconsistencies in their earnings
  • The company is focusing on generating free cash flow, reducing leverage, and delivering new experiences to the customer. The company is shifting its focus to digital segment.

Moat Analysis

Rating: 2/5 - Narrow Moat Caesars has a moat in the form of its established presence and brand recognition, specifically in the Las Vegas segment. However, the regional segment and particularly digital segment appear highly competitive and may not create sustainable advantages that create a true moat, this leads to an overall narrow moat rating.

  • Brand Recognition (Narrow): Caesars’ brand, especially in Las Vegas, has historical significance. However, this name recognition alone isn’t a wide economic moat, as they compete against other big players in the industry. It helps them in acquiring customers, as they know the company, but doesn’t protect them from competitors.
  • Scale Advantages (Partially): Caesars has significant scale because of its large footprint. The scale may provide some benefit, but it does not allow much pricing power or reduce competitive intensity. The company faces many other big competitors in the markets they operate in, nullifying any scale benefits.
  • Customer Switching Costs (Minimal): Switching costs in the gaming industry are generally low, because most customers are not locked into any given property or online offering. Most people are willing to switch to other providers for promotions, etc, therefore any potential switching costs are easily circumvented.
  • Network Effects (Limited): The network effect is present to a certain extent in their online platforms, but it’s not powerful enough to dominate the other online gaming providers, and so it does not create an advantage for the business.

Overall, the company has a narrow moat, however, there is some potential for it to grow larger over time with the company’s focus on the growing digital segment of the business, which if done correctly can build an economic moat.

Risks to the Moat and Business Resilience

  • High Debt: Caesars has a high level of debt, which is something the management is working to improve, and if left unchecked could jeopardize the company’s financials and reduce its flexibility to make future investments.
  • Regulatory Changes: Gaming regulations can change rapidly, new laws can be introduced, or current ones modified, which may hurt existing business operations, margins, or even require additional investment to comply with the laws.
  • Competition: The gaming industry is fiercely competitive and new market entrants can rapidly capture the market or force pricing wars, thus threatening the economic moat. This is especially true in the digital gaming segment.
  • Economic Downturns: The gaming industry is vulnerable to economic downturns, as consumers tend to reduce spending on discretionary entertainment options during economic difficulties.
  • Technological Changes: The technological landscape is constantly evolving, with new gaming innovations and platforms emerging regularly, making older platforms/games obsolete, and forcing the company to keep up with the pace of changing technology.

The company’s current debt and the rate at which it has been decreasing is something to be wary about. Even though the company has had a positive FCF the company is still highly leveraged, therefore should focus on reducing debt.

Understandability Rating

Rating: 3/5 - Moderately Complex Caesars’ business, while it operates in an industry that many people are familiar with (gaming and entertainment), is more complex than most companies. The company is geographically diverse and caters to a wide range of customers. Understanding how each of its individual businesses performs is quite difficult because of the lack of granularity in reports, and due to limited transparency. Moreover, understanding and predicting the evolving and changing digital gaming segment also presents a level of complexity that is hard to comprehend for a casual investor. The inter-relationship between the land-based casinos and the digital segment, including the regulatory impact across different states, also adds another layer of complexity, which makes it harder to understand at a more granular level. For these reasons, the company’s understandability rating comes out at a 3/5.

Balance Sheet Health Rating

Rating: 2/5 - Unhealthy Caesars has shown consistent efforts to reduce debt but is still highly leveraged, and the high levels of debt are cause for worry. The large number of acquisitions, though may prove fruitful for growth in the future, also added to the large amounts of debt. For this, we give it an unhealthy rating. It also seems the cash flows are not stable, as it depends on how well the economy performs. In addition, although the company has many properties, they are more leveraged to certain places, specifically Las Vegas. The risk comes from the fact that these markets are prone to economic downturns and competitive pressures. So, based on all that, its balance sheet is not as strong as the company requires it to be. This gives it a rating of 2/5.

Recent Concerns and Management’s View

In the Q3 2023 earnings call, management was very confident on the future of the business and stated they expect revenue to grow significantly in the digital segment and also emphasized their commitment to paying down debt. Management stated they are aiming for a leverage ratio (net debt divided by trailing 12 month EBITDA) of 5 by 2025. They are also working to increase free cash flow, as well as continuing to improve operations in their physical locations.

  • High Leverage: In the recent earnings call, management acknowledged their high levels of debt, but they also emphasized their commitment to reducing it over the next few years, with a target leverage ratio of 5 by 2025, which shows positive intent. In addition, they talked about the possibility of refinancing some of its debt, which can decrease its overall cost of capital. However, in the present high interest rate scenario, debt could put significant strain on the company’s financial health.
  • Slowdown in Las Vegas: The performance in Las Vegas has recently been a cause of concern for the management. Revenue has declined by 4.7% YOY, which has forced the management to look for new operational strategies. They expect the market in Las Vegas to turn around.
  • Growth in Digital: The company has been focusing extensively on growing its digital segment. They have also reported a 22% YOY revenue increase. This is a very good area to focus on to create and maintain future profitability. Management has stated they expect to continue growing in this area.