What Should You Pay for Caesars Entertainment?
My trip around the gaming industry looking for value continues today with Caesars Entertainment (NAS: CZR) , one of the dominant players in Las Vegas. In the last few weeks I've taken a look atLas Vegas Sands (NYS: LVS) and Melco Crown (NAS: MPEL) , which I determined were valued at the high end of what I think is a comfortable valuation range. Today we move the focus to the U.S., where the dynamics are completely different and multiples need to be dropped dramatically to account for slower growth.
Las Vegas is no Macau
When we look at valuing gaming companies, the easiest way to value them is to take EBITDA, essentially the cash a resort is generating, and multiply it by a reasonable multiple to determine what we should be willing to pay for both the debt and equity of the company, also known as the enterprise value. In analyzing Las Vegas Sands and Melco Crown, I used multiples of eight to 10 times EBITDA to value their Asian operations because this is a high-growth area. In Las Vegas I used a multiple of five to seven times because Las Vegas isn't growing as quickly as Macau or Singapore.
With Caesars we have to consider what Atlantic City and the company's various regional casinos are worth. In 2011, Atlantic City gaming revenue declined 7%, so it's easy to see that EBITDA multiple we use should be lower than the one for both Las Vegas and Macau. Considering gaming is declining so quickly, I'm going to go all the way down to an EBITDA multiple of three to five times to determine what the enterprise is worth.
In regional gaming, I will use the same multiple, not only because revenue and EBITDA are either declining or growing at anemic rates for Caesars' regional casinos, but also because competition is only getting stronger. Wynn Resorts (NAS: WYNN) is looking at both Boston and Miami for possible expansion, Las Vegas Sands has entered Pennsylvania, and regional operators are building all over the country. These aren't conditions that deserve a premium multiple.
Putting a price on Caesars
With all of these things considered, I have created the table below to put a value on Caesars as an enterprise. The EBITDA number for each region is multiplied by the multiple I discussed above to give an enterprise value range.
|Las Vegas||$823.7 million||15%||Five to seven times||$4.12 billion to $5.77 billion|
|Atlantic City||$278.2 million||(6.1%)||Three to five times||$834.6 million to $1.49 billion|
|Other U.S.||$776.7 million||(2.9%)||Three to five times||$2.33 billion to $3.88 billion|
|Total||$1.88 billion||$7.3 billion to 11.1 billion|
Source: Company filings.
The numbers I have used above do not include EBITDA or losses incurred under what the company calls "Managed, International and Other," so my EBITDA is actually higher than reported property or adjusted EBITDA for 2011. I'm not trying to overvalue the company, but I am trying as hard as I can to be generous to Caesars, for reasons you will see in a minute.
Debt drags down the enterprise
This is the point where I subtract the debt, net of cash, to find what the equity of a gaming company is worth. In Caesars' case, the debt is $19.8 billion and cash is $905 million. But if I subtract $18.9 billion from even the high end of the enterprise value I calculated, I get an equity value of -$7.8 billion.
If I just divide the net debt by the EBITDA number I used above (remember, I'm using a very generous EBITDA number), I determine that debt alone is worth over 10 times Caesars' EBITDA. That's more than the multiple assigned to Las Vegas Sands or Melco Crown's Asian operations.
Foolish bottom line
Unless you think Atlantic City and/or regional gaming are headed for a giant bounce, there's really no reason to touch Caesars Entertainment's stock. And there is little evidence to suggest that either region is on the comeback trail.
Even if you wanted to make a bet on Las Vegas, I think MGM Resorts (NYS: MGM) would be a better buy because it has less exposure to these slowing markets and some exposure to Macau.
At the time this article was published Fool contributorTravis Hoiumdoes not have a position in any company mentioned. You can follow Travis on Twitter at@FlushDrawFool, check out hispersonal stock holdingsor follow his CAPS picks atTMFFlushDraw.The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.
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