Hotel and casino entertainment company Caesars Entertainment (NASDAQ:CZR) fell short of the market’s revenue expectations in Q3 CY2024, with sales falling 4% year on year to $2.87 billion. Its GAAP loss of $0.04 per share was also 128% below analysts’ consensus estimates.
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Caesars Entertainment (CZR) Q3 CY2024 Highlights:
- Revenue: $2.87 billion vs analyst estimates of $2.92 billion (1.5% miss)
- EPS: -$0.04 vs analyst estimates of $0.14 (-$0.18 miss)
- EBITDA: $1.00 billion vs analyst estimates of $997.6 million (small beat)
- Gross Margin (GAAP): 52.9%, down from 54.5% in the same quarter last year
- Operating Margin: 22.4%, down from 24.2% in the same quarter last year
- EBITDA Margin: 34.8%, in line with the same quarter last year
- Market Capitalization: $9.85 billion
Tom Reeg, Chief Executive Officer of Caesars Entertainment, Inc., commented, “During the third quarter, we delivered another quarter of $1 billion of same-store consolidated Adjusted EBITDA. Results in Las Vegas reflect record third quarter hotel, F&B and banquet revenues driven by strong occupancy and cash ADRs. Regional segment operating results were negatively impacted by new competition, construction disruption and difficult comparisons versus the prior year. Caesars Digital set a new all-time quarterly record for Adjusted EBITDA driven by over 40% growth in net revenues.”
Company Overview
Formerly Eldorado Resorts, Caesars Entertainment (NASDAQ:CZR) is a global gaming and hospitality company operating numerous casinos, hotels, and resort properties.
Casino Operator
Casino operators enjoy limited competition because gambling is a highly regulated industry. These companies can also enjoy healthy margins and profits. Have you ever heard the phrase ‘the house always wins’? Regulation cuts both ways, however, and casinos may face stroke-of-the-pen risk that suddenly limits what they can or can't do and where they can do it. Furthermore, digitization is changing the game, pun intended. Whether it’s online poker or sports betting on your smartphone, innovation is forcing these players to adapt to changing consumer preferences, such as being able to wager anywhere on demand.
Sales Growth
Examining a company’s long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Thankfully, Caesars Entertainment’s 34% annualized revenue growth over the last five years was incredible. This is a useful starting point for our analysis.
Long-term growth is the most important, but within consumer discretionary, product cycles are short and revenue can be hit-driven due to rapidly changing trends and consumer preferences. Caesars Entertainment’s recent history shows its demand slowed significantly as its annualized revenue growth of 3.2% over the last two years is well below its five-year trend. Note that COVID hurt Caesars Entertainment’s business in 2020 and part of 2021, and it bounced back in a big way thereafter. 
We can dig further into the company’s revenue dynamics by analyzing its most important segments, Casino and Hotel, which are 55.6% and 17.9% of revenue. Over the last two years, Caesars Entertainment’s Casino revenue (Poker, Blackjack) averaged 42.8% year-on-year growth. On the other hand, its Hotel revenue (overnight bookings) averaged 67.1% declines.
This quarter, Caesars Entertainment missed Wall Street’s estimates and reported a rather uninspiring 4% year-on-year revenue decline, generating $2.87 billion of revenue.
Looking ahead, sell-side analysts expect revenue to grow 4.9% over the next 12 months. Although this projection shows the market thinks its newer products and services will catalyze better performance, it is still below the sector average.
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Cash Is King
Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.
Caesars Entertainment has shown poor cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 3.9%, lousy for a consumer discretionary business. The divergence from its good operating margin stems from its capital-intensive business model, which requires Caesars Entertainment to make large cash investments in working capital and capital expenditures.
Key Takeaways from Caesars Entertainment’s Q3 Results
We struggled to find many strong positives in these results as its revenue and EPS fell short of Wall Street’s estimates. Overall, this was a weaker quarter. The stock traded down 4.5% to $43.20 immediately after reporting.
Caesars Entertainment underperformed this quarter, but does that create an opportunity to invest right now?What happened in the latest quarter matters, but not as much as longer-term business quality and valuation, when deciding whether to invest in this stock. We cover that in our actionable full research report which you can read here, it’s free.