Caesars prepares to boost consumer spending, analyst says

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Posted: July 18, 2022, 2:22 a.m.

Last update: July 18, 2022, 03:09 a.m.

Caesars Entertainment (NASDAQ:CZR) is among the casino operators that could benefit as consumers direct more of their discretionary spending toward services rather than goods, according to a research firm.

Caesars
Caesars Palace Las Vegas. Morningstar sees Caesars stock benefiting from changes in consumer spending. (Image: Bloomberg)

During the early days of the coronavirus pandemic, consumer spending was largely focused on goods. Conversely, services, such as almost everything related to travel, have languished due to pandemic-related restrictions, reduced airline flight offers and vaccine requirements, among other factors. . This trend is reversing and this could benefit travel and leisure stocks, including casino operators.

As spending shifts to services, one of the areas we believe is best positioned to benefit is the travel and entertainment industry. This industry includes air travel, cruise lines, gaming, hotels and ridesharing, and is supported by technology providers dedicated to the travel industry,” writes Morningstar analyst Dave Sekera.

There is something to this thesis, as the American Gaming Association (AGA) noted last week that May 2022 was the best May on record for the domestic commercial casino industry, with gross gaming revenue ( GGR) of $5.1 billion, which was the industry’s second-best month. checked in. This is particularly relevant for Caesars, as by number of sites it is the largest casino operator in the country.

Caesars has assets to capitalize

As with other gambling stocks, Caesars is plummeting this year. Stocks are slumping due to culprits such as inflation and margin issues. On the bright side, margin issues may be overdone, and Caesars may have some momentum on that front.

Additionally, Harrah’s parent company is the second largest on the Las Vegas Strip – a status critical to the underlying investment thesis. Sin City is in the middle of one of his best GGR stretches ever. This comes with still-low occupancy rates Sunday through Wednesday, indicating that when convention and meeting business returns in earnest, casino companies such as Caesars could benefit materially.

“With over 60 million members in its industry loyalty program, its leadership in digital and sports games, and the additional synergies that will come from its merger with Eldorado in 2020, we believe Caesars is best positioned to benefit of the recovery of the gaming industry, ” notes Sekera.

The Morningstar analyst adds that MGM Resorts International (NYSE:MGM) is another potential beneficiary of high spending on consumer services. The research firm has five-star and four-star ratings, respectively, on Caesars and MGM.

Hotel rebound could lift Caesars

Obviously, getting guests to tables and slots is an essential part of the casino’s business model. But for operators of integrated resorts like Caesars, filling hotel rooms is almost as important.

On that front, there’s evidence of a potential rebound materializing, and that could pick up steam in 2023, assuming conventions return to Las Vegas.

“As vacations were postponed and business trips canceled in 2020, on average, the amount of revenue per available room fell by more than 60% in the hospitality industry,” Sekera concludes. “Revenue and occupancy levels began to rebound in 2021, and in 2022 we expect many hotels to return to 90% of their pre-pandemic levels. Generally, we expect hotels under our coverage to return to pre-pandemic levels in 2023.”

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