On Thursday, 7th February at 12.50pm ET, Caesars Entertainment (NASDAQ:CZR) was trading at $8.56, with a market capitalization of $1.07 billion.
On Friday, 8th February, CZR reached an intraday high of $14.25 and closed at $13.91. In less than two trading sessions, the stock gained over 66%. From the intraday lows of $7.12 reached on 29 and 30 January, the stock doubled - all in less than two weeks. At Friday's close, the company's market capitalization has ballooned to $1.743 billion.
What caused the spike in the CZR share price? Not much. As described by Seeking Alpha's Market Currents on Thursday, "Gaming companies with ties to New Jersey are on the move after Governor Chris Christie asks for revisions to a bill covering online gaming in the state."
The debt market also suggests that the move in Caesars is overdone.
This page shows the various bonds issued by Caesars, and their worrying details.
Most issues are rated no higher than CCC, and many are trading at yields in the high teens. The most active bond, (CUSIP 413627BM1, 10% coupon due 15 December 2018), recently traded at 69.15, to yield 18.93%.
Despite the manic activity in Caesars' common stock on Thursday and Friday, CZR bonds only moved marginally higher. For example, the above December 2018 bond was at 65.50 before the online gaming announcement. Even after price rises on Thursday and Friday, the prices and yields of Caesars' junk bonds strongly suggest that the online gaming announcement will have little effect on Caesars' long-term solvency.
Looking at the most recent 10-Q for Caesars, we can see the following:
(all figures in millions of dollars as at 30 September 2012)
Deferred credits and other
Deferred income taxes
Caesars stockholders' equity
We can see clearly that Caesars is a highly leveraged company, with nearly $20 billion of debt, compared to only $114 million in equity (and only $33 million of this attributable to Caesars' shareholders). Furthermore, if we exclude goodwill and intangible assets, then the company has net tangible assets of about negative $7 billion!
Profit and loss
(all figures in millions of dollars for 9 months ending 30 September 2012)
Loss from operations
Other gains / income
Loss from continuing operations
Not only is Caesars a highly leveraged company, it is struggling to earn a profit from its operations, before considering the over $1.5 billion in interest expense it incurred in just the first 9 months of 2012.
Secondary offering of stock, and/or a chance for insiders to exit?
Occasionally biotech companies will soar by 50% or more in a day or two, just like the recent action in Caesars. Like many biotech companies, Caesars has a weak balance sheet, and is generating substantial losses each year. Like many biotech companies, this spike in the company's share price provides a great opportunity to sell additional stock at an unusually high level in order to reduce the company's debt burden and interest expense burden. One would not be surprised if Caesars took this opportunity to sell additional common stock, if the share price remains at these lofty levels in the coming days. On this topic, on 12 April 2012, the company filed a prospectus to sell up to 10 million shares from time to time.
Furthermore, the spike may provide a chance for insiders to sell some of their shares while the company's share price and trading volume remain high.
Caesars' long-term future is in doubt as evidenced by the high yields its bonds attract and the ratings assigned to these securities. This was true before the online gaming news released on Thursday and little has changed since then.
Caesars is making miniscule operating profits, but these are tiny compared to the massive interest expense it incurs on its near $20 billion in long-term debt.
Caesars' balance sheet is a good example of an overleveraged company that will most likely need to be restructured in the years to come, either as a friendly negotiation with bondholders or in bankruptcy court.
The negligible change in the price of Caesars' bonds on Friday confirms that the online gaming announcement will have little effect on the company's long-term viability, and suggests that the 66% price rise in the company's stock following the online gaming announcement is excessive.
Additional disclosure: The author of this report is short CZR stock, short CZR call options and long Harrahs (CZR) bonds. The above commentary is provided for informational purposes only. This article does not take into account your personal circumstances, and as such, you should consider whether its content is relevant to your situation. Before buying or selling any security you should conduct your own research and analysis, and seek advice from an independent financial adviser.