Caesars takes a bath; MGM weak

Although third-quarter results were announced last week for Caesars Entertainment, they took a distant back seat to the news that the company was selling its Ferris wheel and Linq Promenade at a steep loss. Howard Stutz of The Nevada Independent cut to the quick, pointing out that the $275 million payday was a 50% discount to how much Caesars spent to develop these dubious assets. The High Roller “observation wheel” was a particular dog, having been built in an awkward location from which there was precious little to see except the backside of the former Imperial Palace and its curious, swastika-like configuration.

The buyers at this fire sale included Texas Pacific Group (a former co-owner of Caesars). Considering that the Promenade and Ferris wheel were producing a measly 3.5% ROI at full price, TPG and its cohorts have their work cut out for them. Significantly, Caesars landlord Vici Properties passed on this turkey, with CEO Edward Pitoniak offering the backhanded compliment that it had the potential to be a “powerful corridor” to 26 empty acres that Vici owns nearby.

Even when one throws in the more-remunerative, $500 million sale of the World Series of Poker, Caesars is left groaning under $11.9 billion in debt. CEO Tom Reeg is tap dancing as fast as he can but his corporate strategy is a mix of asset sales and growing cash flow by dint of opening more and more casinos (as opposed to same-store growth). It doesn’t seem like a playbook for long-term survival, although Wall Street is always hard-put to look more than 90 days into the future.

Deutsche Bank analyst Carlo Santarelli called the 3Q24 results “weaker than expected” for the giant, with only the online division producing better-than-anticipated numbers. Wall Street thought Caesars would deliver $6 million more on the Las Vegas Strip and $20 million more in the boondocks, not counting the $10 million or so wasted trying to keep sports betting out of Missouri. Wrote Santarelli, “Net-net, while not wildly out of line with expectations, the aggregate result was more of the same, with Las Vegas flat to slightly down, regionals decelerating to the downside, and Digital outperforming.” Bright spots include stronger group business next year and higher room revenue overall. Dimmer ones included significant headwinds to regional business going into 2025.

Santarelli was too polite to put it this way but Caesars took TPG to the cleaners on the Linq/High Roller transaction (14X cash flow), so congratulations to Reeg for perfuming that pig so nicely. J.P. Morgan‘s Joseph Greff said the Roman Empire was making progress … in its non-core assets. Although he had reason to be disappointed, his expectations being even rosier than The Street’s consensus, he wasn’t. “Overall, we don’t view these results (overall or by segment) as materially different than investor expectations,” he wrote dismissively ahead of the 3Q24 earnings call. He did shave a bit off his digital and regional projections for 4Q24 but stood firm on Las Vegas ($499 million in expected cash flow). Caesars’ Sin City hotels ran at 97% occupancy, but players are gambling less both at the tables (-12%) and the slots (-4%). Looking ahead to next year, things are pretty flat save for a big uptick in online gambling. Greff kicked his price target for $CZR up to $58/share from $54.

David Katz of Jefferies Equity Research observed that the digital outperformance included ROI of $52 million, over triple his expectation. However, on a terrestrial front, Caesars is facing significant new competition in Illinois, Indiana and Nebraska. He added that foul weather could dampen Q4 but applauded “the strong conversion of customers from regional markets to Las Vegas.” He also upped his price target, from $51/share to $52, albeit more cautiously than Greff. Like Santarelli, Barry Jonas of Truist Securities stood firm on his price target ($52/share) but liked the higher hold Caesars was reaping from sports betting. (Higher parlay mix, perhaps?) He had guessed best where the Roman Empire’s numbers would land, so was not disappointed. He cheered the strong ROI of the Versailles Tower at Paris-Las Vegas and observed that “the catch up accrual for the union contract does not recur in Q4,” good news both.

Jonas further observed that “Amid an increasingly competitive regional landscape, we see significant potential upside with the New Orleans property coming online … We also note that for the New Orleans property lines of gaming credit for this past weekend’s Taylor Swift concerts (10/25-27) rivaled those for the Super Bowl (2/9).” Who new that Swifties were such whales? The carcass of Wynn Bet is being devoured by Caesars, which is rolling out its third online identity, Horseshoe. Holy brand confusion, Batman! Never underestimate Caesars’ ability to go into competition with itself.

When it came to MGM Resorts International, whose earnings followed hard upon Caesars’, Katz offered a diplomatic “mixed quarter” assessment. However, Katz saw causes for optimism in the effect of property upgrades, the boost provided by Marriott Bonoy and “a durable Las Vegas market.” Wall Street expected a bit more than $4.2 billion in revenue from MGM, which delivered slightly less than that (but not a whopping shift). Likewise, the cash-flow miss was way back in the decimal points. Like Caesars, MGM enjoyed an outperformance by its digital arm, BetMGM. In the hinterlands, category killers like Borgata and MGM National Harbor also exceeded expectations, by $22 million. And while $24.5 million in negative ROI was anticipated from BetMGM, it bled but $3 million, which counts as a victory of sorts, especially in the online sphere.

The big miss was in China, where MGM Grand Paradise expected $999 million and delivered $929.5 million. MGM has been riding high in Macao since Covid-19 restrictions were lifted but the competition is obviously catching up again. To claw that market share back, MGM is adding high roller villas, converting base-price rooms into suites and opening a museum. On the Strip, the Marriott alliance continues to be a strong propellant, with 70% of customers paying with cash rather than converting rewards points. Katz was sufficiently emboldened by both Macao and Vegas to add a dollar to his $51/share target.

Greff was less diplomatic, calling the MGM numbers “softer than expected” and blaming them in large part on declining baccarat play. We always say that baccarat can ruin a quarter and this was a case in point, if you accept Greff’s thesis. Strip cash flow was inflated by a $37 million payday on insurance for 2023’s cyber debacle and by $20 million in writeoffs. Unlike Caesars, slot coin-in was up 4%, while room rates escalated 6.5%. Not so good was table play, down 7%. Baccarat alone wiped $80 million off the easel. The Las Vegas Grand Prix still provides a glimmer of Q4 hope but Greff nonetheless dropped his price target from $51/share to $48.

Santarelli minced even fewer words. “Weaker than feared” was his stern verdict. He said that he had kept his expectations muted. “That said, results are likely to have surprised to the downside, specifically in Las Vegas [where cash flow fell 7%, adjusted] … We believe the result is likely to add further concern around the health of the Las Vegas Strip, into a difficult 4Q24 comparison period for the market.” Like us, he took little comfort in the Macanese results, although he allowed that regional casinos in the U.S. did slightly better than he thought they would, even after $17 million in insurance proceeds related to the September ’23 computer catastrophe.

As for next year, “management noted that the outlook for the Strip is broadly favorable and underpinned by cash rate growth.” On the flip side, 4,000 rooms at the Green Monster, er, MGM Grand will be under renovation and there’s no $65 million Super Bowl boost next year. Santarelli whacked four bucks off his price target for MGM shares, bringing it to $48.

Jonas’ price target slipped from $56/share to a still-optimistic $54. He recorded managerial optimism regarding 2025 revenue growth, 12% database growth (heartening) and top brass’ excuse that baccarat debility “was due to VIP trip timing, not high-end consumer weakness.” Unambiguous pluses included record ADRs on the Strip, fanned in part by strong convention business in September. Ditto the Marriott pact, which is filling 2,500 Vegas rooms a night, with group traffic counting for 200-300 rooms at a time. To further juice Marriott traffic, MGM is rebranding its Delano hotel as a “W,” news that played to mixed reviews, although we have a hard time arguing with it.

This just in … Congratulations, Las Vegans, the creampuff Las Vegas Raiders are one of the worst teams in the NFL, a miserable 2-6 coming into today. Maybe downsizing the offense wasn’t such a hot idea. Ditto putting the inmates in charge of Mark Davis‘ asylum. Maxx Crosby and other Raiders need to stop writing checks with their mouths that their asses can’t cash—at least until they can beat the terminally hopeless Carolina Panthers once or twice.