Caesars Entertainment touted its strongest quarter in company history for adjusted earnings led by strength in Las Vegas, profitability in its digital segments, and a record in its regional markets. The company also expects to award a large pay increase to Culinary Union members in Las Vegas once ongoing negotiations are completed.
“All three segments grew adjusted earnings year over year,” according to Anthony Carano, Caesars’s president and chief operating officer during a third-quarter earnings call on Tuesday.
“Starting with our Las Vegas segment, demand trends remained healthy during the third quarter, with occupancy increasing to 96.6% versus 93.6% in the prior year,” Carano said. “Total Las Vegas segment revenues were up 4%, driven by higher occupancy and higher average daily rates that drove record hotel revenues, record gaming revenues, and record food and beverage revenues.”
Las Vegas generated $494 million in adjusted earnings with a margin of 44%. The group segment reported an all-time third-quarter record for adjusted earnings, Carano said.
“As we look to the remainder of the year, Las Vegas continues to benefit from strong leisure and casino guest demand, a robust events calendar, and continued strength of the group and convention segment,” Carano said. “We’re looking forward to the inaugural F1 race in November and the culmination of significant planning and infrastructure improvements executed by the city in order to deliver a great event. Heading into 2024, we’re also excited for Las Vegas to host the Super Bowl in February, in addition to many other new and exciting events planned throughout the year. Las Vegas continues to benefit from one of the strongest event calendars in the United States.”
In Caesars’s regional segment, Carano said revenues rose 2% over last year and adjusted earnings grew to $575 million, the best regional quarter on record. Stable guest demand combined with “excellent performance” from completed capital projects and newly opened facilities offset competitive pressures in a few of the markets, Carano said. “Our regional segment is benefitting from a diversified portfolio across the United States.”
Caesars expects a fourth-quarter opening for its Harrah’s Hoosier Park expansion and its new Versailles Tower rooms at Paris Las Vegas by the end of the year. In 2024, Caesars anticipates complete permanent facilities in Danville, Virginia, and Columbus, Nebraska, as well as the new hotel tower and completely remodeled Caesars New Orleans project.
“We’re looking forward to a strong finish to 2023,” Carano said. “Consumer demand remains strong and our capital projects are winding down. We’ll continue to remain focused on operating-cost efficiency, harvesting returns on project capital, and driving long-term EBITDA growth.”
Chief Financial Officer Bret Yunker said Caesars expects to post a strong fourth quarter heading into 2024. He said the company has applied $700 million of cash flow to debt reduction and acquisition of the remaining equity interest in its Baltimore asset.
“It was an extremely strong quarter for us,” said CEO Tom Reeg. “Vegas remains quite strong in terms of headwinds in Vegas in the quarter. We’re accruing for the anticipated expenses that will come with the new union contract. We had Rio leave the system Oct. second and it limped out the door in terms of how it was performing in the third quarter.”
As for the Culinary Union contract, Reeg said they’re in active dialogue and he’s optimistic they’ll reach an agreement.
“We’ve done quite well as a company post-merger and post-pandemic and our employees should and will participate in that,” Reeg said. “When we reach an agreement on a contract, it’s going to be the largest increase for our employees in the four decades since we started interacting with the Culinary Union. That’s well deserved and it’s anticipated in our business model.”
In terms of regional properties, Reeg said they’re seeing stability with the customer base, but weakness in properties that have competitive openings, such as Tunica and Chicago.
“If you want to hang your hat on something that feels soft, Atlantic City feels soft, but that’s not particularly news at this point,” Reeg said. “The return from our projects that have come online — Lake Charles, Virginia, and Horseshoe Indianapolis — have been quite strong and offset the weakness in the properties that are competitively impacted. We feel very good about regionals. Moving forward, New Orleans is in the midst of a significant construction project, particularly disruptive for the next quarter or two. A third of the casino floor is torn up on any given day, as we do the heavy work. We topped off the hotel tower and are on target to open that expansion completely well in advance of Super Bowl 2025.”
In its Caesars Digital segment, the company said it generated $2 million in adjusted earnings versus a $38 million loss a year ago. That marked the second consecutive quarter of profitability and is now positive on a trailing 12 months.
Online sports betting increased 14% and icasino handle improved 38%. Revenues were impacted by lower year-over-year hold in both online sports betting and icasino segments.
During the quarter, Caesars delivered a new standalone icasino app, Caesars Palace Online, which It drove monthly gaming revenue in its first full month of operation to a record.
Caesars launched several new product features for football for online sports betting, including a live-streaming product for nationally broadcast NFL games. It offers sports betting in 30 North American jurisdictions, of which 24 offer mobile wagering. It operates igaming in all six jurisdictions.
Wall Street analyst Carlo Santarelli of Deutsche Bank said in a note to investors that the Caesars results were “broadly better than our forecasts, though concerns around the outlook remain front of mind for investors.”
The bull case for F1, the Super Bowl, strong group bookings in Las Vegas, regional unit growth, and digital improvements “have given way to concerns around the impact of a looming recession and a deteriorating U.S. consumer. We have believed and continue to believe that the cyclical peak for Caesars, and others exposed to the Las Vegas Strip and domestic drive to markets, has passed, and we continue to believe that estimated risk is to the downside for the group, as we curb our forecasts with this note. That said, post our negative revisions, at current levels, we see shares as attractive for longer-term-oriented investors and we believe lower consensus forecasts will promote interest from short-term-oriented investors.”
Santarelli said they don’t think the third-quarter results are likely to be “overly meaningful for the investment community, as they simply, in our view, serve to reinforce the following widely held views” that Las Vegas remains resilient, regional markets remain challenged from a top-line perspective, the digital segment remains largely static from a revenue/market share perspective, and costs are increasing in the brick-and-mortar segments.
“At current levels and based on our revised lower forecasts, Caesars shares are offering free cash flow yields of 15.5% (2024) and 17.2% (2025), reasonable, in our view, given the near-term risks,” Santarelli said. “That said, as previously noted, we believe current levels represent attractive entry points for longer-term-oriented investors and as such, we reiterate our buy rating. Our price target goes to $60 from $70, given our estimated revisions and the shift to 2025 as our base year for valuation.”
