The adage with investing is ‘stick to what you know.’ In my opinion, it’s just a nice thing to say. The smarter investors I know will adjust their strategies to changing market conditions and cultural shifts. One of the big cultural shifts I have seen that has remained post-pandemic is that people are much more focused on entertainment and self-gratification. This would explain things like car sales dropping and restaurants remaining full for example.
Entertainment tastes may have changed due to the pandemic. In contrast to the trend toward digital and remote entertainment, live, in-person encounters are gaining popularity. The post-pandemic concentration on entertainment reflects these new habits and a desire to reconnect with pre-pandemic activities.
The consequences of the COVID-19 pandemic on entertainment consumption patterns are enduring, as they have significantly altered the way in which individuals interact with entertainment. As a result of social isolation and tension, the significance of entertainment as a source of solace and diversion was heightened throughout the pandemic. Consequently, digital forms of entertainment—including streaming services, video games, and social media—became more prevalent. It is probable that the continued prevalence of these platforms can be attributed to the convenience and variety they offer, even in the aftermath of the pandemic.
Additionally, the pandemic accelerated the fusion of physical and virtual forms of social entertainment. Virtual gatherings that were experimented with, such as video chats and online game evenings, may remain popular. Conversely, a renewed fascination with outdoor pursuits and live performances has emerged as individuals long for the experiences they were unable to partake in while confined indoors. The rekindled admiration for face-to-face interactions stands in contrast to the enduring solace derived from digital forms of entertainment.
Financial and mental health concerns have impacted post-pandemic entertainment preferences. The economy's repercussions could prompt some individuals to seek out more economical home entertainment options, whereas others might be more inclined to invest in live experiences. Numerous individuals resorted to amusement as a means of escaping their troubles; this trend may continue as individuals continue to confront the aftermath of the pandemic.
Why Do Caesars Come In?
Caesars Entertainment (CZR) a well-established entity in the hospitality and entertainment sectors, effectively corresponds to the changing preferences of the entertainment industry. Recognized for its casinos, hotels, and resorts, the organization provides a fusion of live and opulent experiences to satisfy the post-pandemic demand for immersive, memorable, and personal entertainment. Its establishments offer a variety of entertainment choices, including dining, retail, gaming, and live performances, to attract guests in search of varied and superior amusement experiences. Furthermore, Caesars' dedication to ensuring a secure and pleasant atmosphere is consistent with the continuous health and safety apprehensions expressed by their clientele. In brief, the offerings of (CZR) exemplify the transition that has occurred since the pandemic, wherein there is a renewed appreciation for live, experiential entertainment and a preference for digital convenience.
Catalysts For Caesars
On July 20, 2020, Eldorado and (CZR) (the former Caesars), a diversified gaming and hospitality company, merged to form (CZR) (previously known as Eldorado, "ERI"). Post-acquisition, Eldorado adopted the former Caesar’s name and changed its ticker from “ERI” to “CZR.” Since the merger, the management has been restructuring its balance sheet and is dedicated to improving its leverage. To accomplish its goal, it has divested many assets and closed many of its properties since the merger. The company has been vigilant in deploying its capital and trying to foray into new ventures that seem profitable and promising to its existing segments.
- Digital Gaming: Post-pandemic, Caesar has identified that the next growth engine will be venturing into digital gaming. This new undertaking would allow them to mitigate the risk that they faced due to the brick-and-mortar model during the COVID pandemic. To accomplish this, they acquired William Hill PLC for £2.9bn, or $3.9bn, which included the UK and international online divisions along with the retail betting shops, on April 22, 2021. Later, as part of the acquisition agreement, they divested William Hill’s international division to 888 Holdings plc for an enterprise value of ~£2.0bn on July 1, 2022. Post-this, it allowed (CZR) to expand their online sports betting and iGaming presence in the US region. Currently, CZR operates across 28 jurisdictions in North America, 20 of which are mobile for sports betting, and operates regulated online real money gaming businesses in six jurisdictions in North America, along with the World Series of Poker (WSOP) brand.
- De-leveraging its balance sheet appears challenging but not impossible. (CZR) has been restructuring its balance sheet to reduce debt and improve liquidity. Currently, management is targeting to tackle its huge debt load of $4.4 billion, which has a maturity date of 2025. Currently, (CZR) has a net leverage ratio of ~5.5x on an LTM basis, with the net debt (capital lease-adjusted) standing at ~$22bn and the adj. EBITDAR (LTM) at $3,965m. (CZR) has total liquidity of $2,934 million, including revolving capacities. Also, proceeds of ~£2.0bn from William Hill's international business sale and non-core assets provided some cushion. As per Bret Yunker (CFO), “CZR continues to simplify their capital structure through the repayment of $250 million Baltimore Term Loan during the 3QFY23, bringing an aggregate debt reduction to over $600 million YTD and reducing the net leverage under bank credit facilities to 3.9x as of September 30, 2023.” In addition, the renegotiation of the labor contract that expired in May 2023 might put some pressure on margins in H2 FY2023. Despite this, management seems confident enough to navigate through these obligations and, at the same time, grow their business inorganically.
- New Venture and Development: In October 2022, (CZR) and SL Green Realty Corp. submitted a joint bid for building up a casino in Times Square. Earlier in the 2022 year, the NYC state legislature proposed three casino licenses, out of which two went to the existing gambling operators, namely Genting Group’s Resorts World Casino in Queens and MGM Resort International’s Empire City Casino in Yonkers in February 2023. While there has been intense competition to acquire the third license, joined by rival bids from related companies and Wynn Resorts, to intensify the competition, Jay-Z and his entertainment company Roc Nation have joined hands with (CZR) and recently made a promise to commit to the welfare of NYC residents and earmarked $115 million for “diverse theatre programs” that would cover daycare costs for Broadway workers. In addition to this, Caesars and SL Green have announced a new Caesars reward partnership for local merchants as an approach to pursuing their gaming license in Times Square. The decision by New York State’s gaming commission is expected later, at the end of 2024.
- Insiders Buying: Michael Pegram is an independent director at (CZR)'s. I like these sorts of company officers, as they like to make money. Corporate governance relies on independent directors' objectivity and impartiality for balanced decision-making. In audit, compensation, and risk management, they detect and mitigate risks while ensuring the organization follows legal and ethical standards. Independent directors on a board demonstrate a commitment to shareholder interests and avoid conflicts of interest, especially in executive decisions, which boosts investor confidence. Strategic planning and regulatory compliance benefit from their unique knowledge and experience. Effective and honest independent directors are crucial indications of a company's governance quality, affecting its financial health and investor appeal. This was Mr. Pegram's tenth open market purchase dating back to his first purchase at $4.25 in Eldorado Resorts, Inc. (ERI) in 2014, with one insider sale as well. Out of all the insider purchases, Mr. Pegram has only lost money once, when he bought 13,000 shares at $68.89 at the beginning of March 2022, spending close to $900,000. Even his sale of 5,000 shares on September 17, 2021, at $110.49 was near the highest level of (CZR) 's stock price over the last 5 years. Therefore, with this May 2023 purchase being his largest trade and his second $1 million open market purchase, where he previously bought 25,000 shares at $44.74 back on November 7, 2022, also amounting to just over $1.1 million, we recognize Mr. Pegram as a strong insider with a good track record to follow. Michael Pegram was previously on the board of Eldorado Resorts, Inc. (ERI) from September 2014 until July 2020, before ERI and (CZR) completed a merger to create the largest casino and entertainment company in the US on July 20, 2020. Since then, Mr. Pegram has been an independent director at CZR. Outside of this, Mr. Pegram's experience is in the horse racing industry and as a director of various casino operations.
The Road Ahead
There are multiple corporate actions, restructurings, developments, and catalysts in motion. (CZR) is on the cusp of entering a growth trajectory. However, there are various headwinds, comprising internal and external factors, that might prove to be a challenge in the short term. In addition to that, foraying into the online gaming and betting industry, thereby capitalizing on its core competencies, will prove beneficial to them. Along with it, the allotment of licenses to set up Caesars Casino at Times Square would be a major catalyst for them. Due to Mr. Michael Pegram's purchase, Caesar Entertainment (CZR) appears to be an alluring and compelling story for a long-term bet.
Apart from that, the Las Vegas Strip could see a potential increase in traffic at the casinos as a catalyst. Recently, we saw the Formula 1 race in Las Vegas on November 16–18, 2023, and will return to light up the Strip on November 21–23, 2024. Likewise, the 2024 Super Bowl will be held at Allegiant Stadium in Las Vegas.
In recent years, there has been a notable trend of professional sports teams relocating to Las Vegas, including the Las Vegas Raiders (relocated in 2020), the WNBA Aces (established their presence in 2018 and secured two WNBA championships in 2022 and 2023), and the NHL's Golden Knights (relocated in 2017 and clinched the 2023 championship). Additionally, there is ongoing speculation about the potential move of the MLB team, the Oakland A's, likely in 2028. Furthermore, with the NBA considering expansion from 30 to 32 teams, Las Vegas and Seattle are currently leading contenders for new franchises. Las Vegas currently hosts the soccer team Las Vegas Lights FC, which competes in the second tier of professional soccer in the US. This situation could potentially pave the way for the arrival of a premier MLS team in the city. Also, with the (SPHR) 's launch at the end of September 2023 in Las Vegas, there will be a lot more foot traffic coming through LA from these unique events.
With all this in mind, Caesars could be a great company to hold going forward.
On the date of publication, Jim Osman did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
