Berko: Bet on Caesars Entertainment?
Friday, December 20, 2013 7:00 AM
Dear Mr. Berko:
I heard that Caesars Entertainment will build a casino in New York City in the next two years. My broker thinks this could be the busiest casino in the U.S., even greater than any in Las Vegas, which seems to be hurting in this economic climate. Would you please give me your opinion of this stock? My broker believes that it could triple in price in the next two years. He has advised that I sell my $18,000 in the Oppenheimer Discovery Mid Cap Growth A Fund, which I’ve owned for five years, to buy 1,000 shares of Caesars.
Before I tell you about Caesars Entertainment Corp. (CZR-$19.90), I’m compelled to tell you that your brokster is a righteous candidate for a transorbital lobotomy. Your Oppenheimer fund (OEGAX-$16.61), during the time you have owned it, has produced a 9.5 percent average total return. It’s a keeper; Caesars is not, and neither is that brokster of yours.
CZR owns and operates a greyhound racetrack, a thoroughbred racetrack and a harness racetrack. CZR also owns the World Series of Poker tournaments plus an exclusive golf course on the coast of Macau, an expensive spit of land jutting into the China Sea that is one of the two special administrative regions of the People’s Republic of China. CZR also owns and operates an online gaming business that provides real-money casino, bingo and poker games in the United Kingdom, a country that may have more bookies than doctors. CZR also owns and operates 52 casinos, with more than 3 million square feet of gaming space, plus 43,000 hotel rooms. Thirty-nine of those facilities (including land-based, riverboat and dockside casinos) are in the U.S. But thanks to Apollo Global Management’s 2008 leveraged buyout, which loaded CZR with more than $1 billion of new debt, I wouldn’t touch this stock with Neptune’s trident. Apollo shafted the shareholders, put hundreds of millions in its corporate pocket, hasn’t paid down a penny of that debt and doesn’t intend to.
Revenues have declined every year since the buyout, from $10.7 billion in 2008 to $8.3 billion this year. And Jiminy Christmas Charlie, in those six years, CZR management managed to cumulatively lose $74 a share. More than 94 percent of CZR’s revenues derive from the U.S., so the odds favor continued losses, as high unemployment, declining incomes, a tepid economy, record consumer debt and rising consumer costs are keeping Americans out of gaming rooms. And the future looks even darker, particularly for CZR’s New Jersey operations: Bally’s Atlantic City, Caesars Atlantic City, Harrah’s Atlantic City and Showboat Atlantic City. New Yorkers recently approved an amendment that will allow seven casinos to open in their state, including three in New York City. This sounds the tolling bell for CZR, which is struggling under the weight of intense competition from casinos in Pennsylvania, Connecticut and Massachusetts. CZR, in order to keep its tables active, may have to comp its gamblers with extraordinary gifts, gratuities and the like to encourage continued business.
I can’t figure out why Goldman Sachs, Georgie Soros, John Paulson’s hedge fund and a bevy of mutual funds own millions of CZR’s 126 million outstanding shares, which have a negative book value of $13.59. Certainly, Donny Trump (his three Atlantic City casinos filed bankruptcy) doesn’t have the cash or credit to help Caesars, and he’d dearly like to dry his hands of this mess he started in 1984. CZR’s earnings for 2014 are expected to come up snake eyes. Its properties are losing value as revenues continue to decline, and CZR bonds trade at deep discounts to par, offering 20 percent current yields to brave takers. Meanwhile, Apollo’s rapacious management dumped so much debt on CZR’s balance sheet that the company doesn’t have the funds to maintain its properties, which badly need to be updated. Apollo’s leveraged buyout of CZR has nearly destroyed the company’s ability to compete. CZR looks like a good candidate for a short sale to $10.
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