Shares of Caesars Entertainment Corp (NASDAQ:CZR) have skyrocketed some 120% year-to-date, and online gambling, while taking shape piece by piece, hasn’t even become a formalized market yet. While the wheels are in motion, and states like New Jersey and Nevada are taking the lead, the regulatory framework is still being developed, which means it’s unclear which companies will take leading market-share positions. So, are investors rightly capitalizing on the future opportunity or could they be overshooting here, responding in knee-jerk fashion to an industry that’s in recovery after a bout with losses during the financial crisis? Perhaps it’s a little of both.
Casinos are facing a new challenge
Scientists and consultants believe it’s possible to track gambling behaviors, identify individuals displaying tendencies for addiction and then warn those gamblers about their behavior, according to The Wall Street Journal. Not surprisingly, Caesars Entertainment Corp (NASDAQ:CZR) CEO Gary Loveman is quoted in the article as saying that it’s a “terrible” concept.
So could this regulatory headwind be fierce enough to derail casinos’ plans for online gambling?
Online gambling is expected to generate up to $1 billion annually in New Jersey and a lesser $50 million to $250 million in revenue in Nevada every year, according to Reuters. While sending users to gamblers’ anonymous could make the pot less sweet for casino companies, the market opportunity is large and diverse enough that staving off potential addicts isn’t likely to ruin it. This despite the fact that in the U.S., between 6 million and 8 million adults suffer from gambling-related problems, according to the National Council on Problem Gambling cited in the WSJ article.
Indeed, the wheels are in motion for revenue to begin flowing from online gambling in 2013. This year, Caesars Entertainment Corp (NASDAQ:CZR) expects to launch online gaming in New Jersey and also its online World Series of Poker brand, which it recently acquired from Electronics Arts, in Nevada. This market should really take shape in 2014 and beyond. As good as it looks, Caesars carries a total of $23.7 billion in debt and has $1.8 billion in cash as of the end of the second quarter.
And it’s not just online gambling that Caesars Entertainment Corp (NASDAQ:CZR)’ is looking to in order to diversify its revenue stream. The company is currently building a 250,000 square foot meeting facility right in the heart of casino mecca Atlantic City, N.J. The company hopes to capitalize on the $16 billion market opportunity for conventions and meetings in the Northeast, which increases this company’s allure.
Caesars Entertainment Corp (NASDAQ:CZR) should also be going up against easier-than-usual comps in the fourth quarter. Last year, Hurricane Sandy hit Atlantic City, N.J., forcing the company to close its five properties for days. The company estimates Hurricane Sandy cost it between $40 million and $45 million in lost revenue. Now that those casinos are up and running again and Atlantic City, N.J. is returning to some semblance of normalcy, performance should be stronger.
One to watch
After a stretch of losses since the financial crisis, MGM Resorts International (NYSE:MGM) recently reported its best performance in five years amid a return to profitability in its first quarter. The company is seeing recovery in places like Las Vegas and growth from MGM China.
China is a growth engine for MGM Resorts International (NYSE:MGM), where the company has been growing its revenue. MGM is benefiting from strong revenue from its table games and slots. In the first quarter, MGM China’s net revenue climbed 6% to $748 million; MGM’s total consolidated net revenue rose 3% over the year-ago period to $2.4 billion.
MGM Resorts International (NYSE:MGM) is going to need to generate all the revenue it can because it’s got $13.6 billion in debt and only $1.5 billion in cash and cash equivalents as of the end of 2012 (up from $13.5 billion in debt in 2011).
But MGM Resorts International (NYSE:MGM) isn’t ready to commit entirely to online gambling, at least not yet. It’s applied for licenses for online gaming in Las Vegas and New Jersey, but unlike Caesars, it’s not prepared to launch an online poker website in Nevada, where internet poker is perfectly legal. It’s waiting to see how regulation shapes up in the online playing field first.
It’s still expanding, though, and is building in places like Macau in China, where it’s constructing a $2.6 billion resort and casino on the Cotai strip that should open in 2016. This turnaround story is still unfolding, but given MGM Resorts International (NYSE:MGM)’s presence in Macau, the world’s largest gaming market, and the company’s recent return to profitability, this business is worth watching. Let’s just hope it doesn’t wait too long and miss out on market share in the competitive online gambling arena in the process.
Making a dent
Las Vegas-based Boyd Gaming Corporation (NYSE:BYD) is saddled with $3 billion in in debt, but the company is taking steps to reduce its burden. In recent days, it issued 16.5 million shares in an equity offering, where it hopes to raise nearly $200 million. The proceeds are being directed toward debt and general corporate purposes. No doubt the company is in clean-up mode, and its taking steps to strengthen its balance sheet. It recently shed its Dania Jai-Alai business for a pretax gain of $18.9 million.
Nonetheless, Boyd Gaming Corporation (NYSE:BYD) warns in its annual report that any increase in capex would result in an increase in its debt load. In 2012, the company generated $142 in cash flow. The company has earmarked $153 million in capex for 2013 to be funded via a credit facility and cash flow; this compares to $126 million in capex in 2012.
Boyd is positioned to capitalize from online gambling via its partnership with bwin.party, a leader in online gaming in Europe. According to its annual report, Boyd is waiting in the wings for the regulatory green light before offering online poker in the U.S. via the bwin.party brand and possibly newly developed brands as well.
Conclusion
It remains to be seen whether industry standards in the casino industry rise to a level that high-risk gamblers will be warned. But even with a warning label, gaming companies are forging ahead and growing their respective businesses. As long as they continue to address their debts, I would consider anyone of these companies for my portfolio in light of the growth potential that lies ahead.
Gerelyn Terzo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
The article Casinos Face Yet Another Headwind originally appeared on Fool.com and is written by Gerelyn Terzo.
Gerelyn is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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