Caesars Entertainment kicked off the fourth-quarter earnings season with a pre-announcement that revenues and EBITDA were below analyst expectations.
So what did the stock do? It leaped 5.3 percent.
A stock jumping on disappointing news is not what is supposed to happen. Now, the news came on an up day for the stock market and a positive session for casino stocks in particular. But 5.3 percent—to close at $46.53, the highest of the young year, no less—far exceeded the performance of the market or the industry.
So what gives?
One answer is that Caesars has done a good job in keeping analysts up to date. Several already had lowered revenue and earnings expectations. And, while they hadn’t quite lowered them enough (Caesars’ EBITDA looks like it will be around 2.5 percent below analyst consensus when full results are released next month), the tone and direction had been set. In other words, no surprises.
Another answer might be that investors were relieved in an uncertain environment. Now we know what Caesars will report, and it’s not the end of the world.
Yet another answer is that there were kernels of good news in the announcement. Digital operations turned positive, despite a hit to online sports betting by bettor friendly game results to the estimated tune of $29 million in EBITDA. In other words, digital, which was minus $5 million in the fourth quarter of 2022, would have doubled its actual result with normal hold.
Finally, Caesars maintained EBITDA margins of 33 percent in its brick-and-mortar operations despite softer revenues, which suggests greater future profitability when revenues resume their growth.
But perhaps the biggest reason for the stock’s resilience comes down not to numbers, but to the human element; more specifically, to CEO Tom Reeg.
It is arguably the case that no CEO in the industry has Reeg’s degree of credibility among analysts and investors. He has consistently under promised and over delivered. So, when he predicts that online sports betting and iGaming will generate annual EBITDA equal to the money invested in their start-up, the $29 million positive figure for the fourth quarter suggests that Tom is doing it again. You can trust this guy.
In brief, he has earned patience and credibility from investors.
It didn’t hurt that the preannouncement came in tandem with Caesars announcing it will tender for $3.399 billion in 6.25 percent debt and that it will borrow $2 billion in an unsecured term loan as part of the refinancing.
Part of Caesars’ investment story is that it will dramatically cut debt with some property sales expected this year to raise funds for that purpose. Expectations are that its overall debt leverage ratio will fall from 5.4 times to under five times, thus providing relief at this time of higher interest rates.
It also doesn’t hurt that the stocks of U.S. casino operators have been in a funk for quite some time. Caesars, for example, is less than half of its all-time high of $119.81 set on what is now way back in September of 2021. In other words, the stock can run up from here and still have room to go to reach its former highs in terms of valuations, expected earnings and nominal pricing.
Given that perspective, Caesars’ less than thrilling preannouncement might actually have been a reassuring one.
