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Caesars Entertainment Corporation (CZR): Rolling Debt-Loaded Dice

 February 11, 2013 12:34 PM


(By Rich Bieglmeier) Gambling stocks rolled sevens last week as Nevada gaming receipts and a Veto with an out from N.J. Governor Chris Christie sparked hopes of legalized online gaming in New Jersey.

According to the Nevada Gaming Control Board, casinos raked in nearly $943 million in winnings during December. Revenues added up to $10.86 billion statewide, a 1.5% year-over-year, and the third consecutive year of growth.

Senior research analyst for the Nevada Gaming Control Board, Michael Lawton says, "We are slowly increasing revenues. We are still 15.5 percent below the peak in 2007, but we are gradually moving in the right direction."

And Wall Street saw Christie's veto a move in the "right" direction, too. The hefty Gov. added that he would OK the bill if it had a 10-year trial period and a higher tax percentage for the state. New legislation meeting his demands is likely to hit his desk for signature in the not too distance future, in our opinion.

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The combination jacked Caesars Entertainment Corporation (CZR) to the third most accumulates stock last week as a percent of its market-cap. Traders bought up more than $38 million of CZR, or 2.19% of the casino's market cap. Shares launched from $8.49 to $13.91 in a matter of two closes.

CZR is expected to report earnings on February 28th. In Q3, superstorm Sandy negatively impacted the quarter as the NJ operations were shut down for five days.  Management said, "the results of operations in this region could be significantly affected in the fourth quarter of 2012, subject to our determination of potential insurance recoveries, if any." In other words, we are going to write off anything we can.

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Year-over-year (YoY) Q3 net revenue was up a touch, 0.4%; however, with "lower casino revenues in all but the Las Vegas and Illinois/Indiana regions."

Rising interest expenses are hampering the company's profitability. Interest expense, net of interest capitalized jumped 14.5% YoY from $450.3 million to $515.7.

We don't think this will help.

On Feb 4, the company announced a $1,500 million bond offering with a 9% yield. The money will be used "use the net proceeds from the offering to repay certain outstanding term loans and to pay related fees and expenses," and will only be available to "qualified institutional buyers in reliance on Rule 144A under the Securities Act, and outside the United States, only to non-U.S. investors pursuant to Regulation S." Does the S stand for suckers? jk

As it stands now, CZR has $21.11 billion in debt and $2.8 billion in current assets and $28 billion in total equity, of which $16 billion is in property and equipment.

Overall, iStock sees the potential for rising storm related costs for Caesars Entertainment Corporation (CZR); an overload of debt causing rising interest payments which will hamper profitability, and potential dip in gaming in 2013 gaming revenue thanks to falling consumer confidence due to higher gas prices and taxes. This is not a good combination in our view.

Although, iStock expects to see a number of states legalize online gaming in the next 12-18 months, which could boost revenue, but we'd prefer alternatives to CZR in the gaming space.

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