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Caesars Entertainment Corp (CZR), MGM Resorts International (MGM): Casinos Face Yet Another Headwind

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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).

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