Caesars Entertainment trades at $29.66 per share and has stayed right on track with the overall market, gaining 15.1% over the last six months. At the same time, the S&P 500 has returned 13.6%.
Is there a buying opportunity in Caesars Entertainment, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Caesars Entertainment Will Underperform?
We’re cautious about Caesars Entertainment. Here are three reasons why CZR doesn’t excite us, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Caesars Entertainment grew its sales at a weak 10% compounded annual growth rate. This fell short of our benchmark for the consumer discretionary sector.
2. New Investments Fail to Bear Fruit as ROIC Declines
ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).
On average, Caesars Entertainment’s ROIC decreased by 1.1 percentage points annually each year over the last few years. Paired with its already low returns, these declines suggest its profitable growth opportunities are few and far between.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Caesars Entertainment’s $24.86 billion of debt exceeds the $1.06 billion of cash on its balance sheet. Furthermore, its 7× net-debt-to-EBITDA ratio (based on its EBITDA of $3.26 billion over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Caesars Entertainment could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Caesars Entertainment can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We see the value of companies helping consumers, but in the case of Caesars Entertainment, we’re out. That said, the stock currently trades at 88.6× forward P/E (or $29.66 per share). This multiple tells us a lot of good news is priced in – you can find more timely opportunities elsewhere. We’d suggest looking at our favorite semiconductor picks and shovels play.
