Don’t Roll the Dice on CZR Stock

I can’t help but feel bad for Caesars Entertainment (NASDAQ:CZR). As any gaming and resort company in Las Vegas, they are highly dependent on consumer sentiment. Prior to the novel coronavirus upending our record-breaking bull market, CZR stock was on the verge of something special. That’s according to Caesars CEO Tony Rodio, who stated that the company possibly had its best two months in its history.

czr stock
Source: Jason Patrick Ross/Shutterstock.com

To be honest, I always take corporate announcements with a grain of salt. But in this case, the data backs everything that Rodio had to say. According to the Las Vegas Convention and Visitors Authority, visitor traffic to Sin City increased notably for January and February of this year, to the tune of 3.9% and 4.5%, respectively.

Better yet, gaming revenue in Clark County, Nevada also increased 5.1% and 0.5% in the first two months of 2020. While a half-percent increase in February doesn’t seem like much, keep in mind that February isn’t exactly the most popular month for Vegas visitations. Thus, by most measures, Sin City appeared to be on a roll. Naturally, this bolsters the case for CZR stock, along with competitors such as MGM Resorts (NYSE:MGM) and Las Vegas Sands (NYSE:LVS).

Unfortunately, the coronavirus pandemic had other plans, quickly overwhelming the U.S. In response, all commercial casinos shut down to curb the spread of Covid-19. Further, Caesars furloughed approximately 90% of its employees at its domestic-owned properties.

When I wrote about MGM Resorts, I mentioned that I saw a documentary entitled “Coronavegas.” I recommend watching it because it shows how much of an uphill battle that Vegas must climb. Thus, I’m in no mood to recommend CZR stock.

For CZR Stock, Everything Depends on the Economy

To address the contrarian argument for a second, some might feel optimism regarding the flattening of the infection curve. While the human toll has been tremendous, mathematically, infection rates have substantially decelerated. Therefore, we are in the final phase of Covid-19, barring some unforeseen recurrence.

Let’s take it a step further and assume that the disease magically disappears tomorrow. Despite such a remarkable development, I would still hesitate recommending CZR stock. Like it or not, casinos depend on a robust economy and we are nowhere near that.

Consider that in the week ending March 21, a whopping 3.3 million Americans filed for unemployment benefits. A week later, a stunning 6.6 million filed jobless claims, exceeding even the worst-case estimate of 5.5 million.

As I write this, I’m not privy to the latest figures, though some forecasts suggest we’ll match last week’s devastating tally. Frankly, it doesn’t matter. Because state agencies lack the capacity to handle the deluge of claims, the numbers we’re seeing are understated.

If that wasn’t bad enough, Las Vegas’ tourism stats are somewhat deceptive. Yes, Sin City’s annual visitor traffic increased 17% between 2009 (36.4 million visitors) and 2019 (42.5 million). However, gaming revenue per visitor during the same period was virtually at parity with each other ($243.13 versus $243.51).

Las Vegas visitors vs. revenue per visitor
Click to Enlarge
Source: Chart by Josh Enomoto

That’s bad news for CZR stock and other casino investments because it signals that consumers are much tighter with their money. Also, I think it’s very significant that despite our record-breaking headline economic statistics, we never broke Clark County’s record gaming revenue of $10.9 billion, set in 2007.

Not surprisingly, in that year, revenue per visitor hit a record of $277.28. Worryingly for CZR stock, Vegas has never come close to reaching this revenue-per-visitor threshold.

The Strip Needs a Miracle

If we’re going to be painfully honest with ourselves, almost every name in the U.S. gambling industry is suspect.

For one thing, Las Vegas will witness a severe erosion in visitor traffic. Of course, this isn’t just due to economic pressure. With most states imposing shelter-in-place orders, nobody can visit even if they wanted to. Further, all jurisdictions have a direct economic incentive to stay quarantined until the coast is truly clear.

If we’re going to shut down, we might as well do so with gusto and kill Covid-19 for good. Nothing could be worse than a premature opening that leads to a second wave of infections.

Second, I anticipate a permanent change in American societal behaviors. This is not like a 9/11 event where select cities suffered an acutely tragic but relatively quick disruption. Instead, the coronavirus has affected all of us, irrespective of our geographic or socio-economic status.

Ultimately, I want to see how this behavioral change plays out over the next several months. Until we have this information, CZR stock or any related name is simply too risky.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.


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