Is the Deck Stacked Against Caesars Entertainment Shareholders?

Source: Thinkstock

Source: Thinkstock

Caesars Entertainment Corporation (NASDAQ:CZR), formerly known as Harrah’s Entertainment, is a well-known business, particularly among adults. There is no doubt it has struggled since the Great Recession Struck. The stock is in an interesting place in the middle of its 52-week range. Should we buy or sell at these levels? To answer this question, we have to understand how Caesars makes its money. It owns, operates, and manages casino entertainment facilities. Its casino entertainment facilities include land-based casinos, riverboat or dockside casinos, and managed casinos, as well as casinos combined with a thoroughbred racetrack and a harness racetrack. The company operates its casinos primarily under the Caesars, Harrah’s, and Horseshoe names. It also operates hotel and convention space, restaurants, and non-gaming entertainment facilities.

In addition, the company owns and operates an online gaming business that provides various real money games in Nevada, New Jersey, and the United Kingdom. Further, it owns and operates the World Series of Poker tournament and brand as well as the London Clubs International family of casinos. But its performance has been lacking and the company is massively leveraged now.

Its most recent quarter was weak. Net revenues decreased 1.9 percent compared with the comparable 2013 quarter, primarily due to a decrease in casino revenues, partially offset by an increase in room revenue and other revenues, primarily attributable to growth of social and mobile gaming business in Caesars Interactive Entertainment, Inc (CIE.) Consolidated casino revenues declined $128.3 million, or 8.6 percent, compared with the 2013 quarter, due to the impact of severe weather, increased regional competition, and continued softness in the domestic gaming market in certain U.S. regional markets outside of Nevada. Gaming volumes, including table and slot volumes, were down in all domestic regions other than Las Vegas, partially due to extreme winter weather in 2014 as compared to a milder 2013.

Additionally, revenues in certain markets were negatively impacted by increased variable marketing program spending that is treated as a reduction of revenue, such as REEL REWARDS, discounts, and free play. On a consolidated basis, room revenue increased $30.6 million, or 10.6 percent, versus the prior year quarter, as a result of an increase in the average daily rate paid for rooms sold, excluding fully complimentary roomsto $113 in 2014 from $93 in 2013, primarily attributable to strong group business in Las Vegas and resort fees, which were introduced in Las Vegas and other Nevada properties beginning in March 2013. Domestic hotel occupancy remained relatively flat at 87 percent for the first-quarter of 2014.