Ron Baron (Trades, Portfolio) is a billionaire growth stock investor who is the founder of Baron Funds, an investment firm that reported approximately $33 billion in 13F holdings as of the end of March 2023.
Investors should be aware that 13F reports do not provide a complete picture of a guru’s holdings. They include only a snapshot of long equity positions in U.S.-listed stocks and American depository receipts as of the quarter’s end. They do not include short positions, non-ADR international holdings or other types of securities. However, even this limited filing can provide valuable information.
In the first quarter of 2023, Baron loaded up on 15 new stocks and added to many positions. One thing that really stood out to me is that Baron's firm was buying shares of three casino and resort stocks; let's take a look.
1. Caesars Entertainment
Caesars Entertainment (CZR, Financial) is the largest casino company in the U.S. The core business has its roots back in 1937 when it opened a small bingo parlor in Reno, Nevada. This was just a few years after Nevada legalized gambling in 1931.
Since that point, Caesars has expanded massively, eating up the Las Vegas strip through the acquisitions of several iconic properties such as Caesars Palace in 1969 and the Rio Casino in 1999. In 2018 the company acquired Tropicana, and in 2020 it merged with Eldorado Resorts.
Today, the business has over 50 world-class resorts which have a goal to create a “family style service and an exhilarating experience."
Baron's firm purchased 833,301 shares of Caesars in the first quarter of 2023, during which shares traded for an average price of $49.
Growing financials
Caesars reported strong financial results for the first quarter of 2023. Its revenue was $2.83 billion, which beat analyst forecasts by $70.42 million and rose by over 23% year over year.
This result was driven by an occupancy rate increase from 83% in the year-ago quarter to 95% in the recent quarter. In addition, the company benefited from a series of promotions targeted at its existing customer base across new states such as Ohio and Massachusetts.
Caesars is also diversifying digitally and launching its iCasino app in the third quarter of 2023. The idea is to increase customer engagement via gaming content and offer enhanced marketing direct to its customer.
Operationally, the company is also rolling out its account management system for players, which ultimately aims to lead to a shared wallet-style system in 2024.
Its sports betting has also expanded to 30 jurisdictions across North America with 22 having access to mobile wagering.
Moving on to margins, the company reported $544 million of adjusted Ebitda (excluding rent) at a 48% margin, which rose by 300 basis points year over year.
Its earnings per share was $0.14 on a non-GAAP basis, which beat analyst forecasts by $0.13.
Caesars has $965 million in cash and short term investments on its balance sheet compared to $25.6 billion in total debt, with ~$12.9 billion in long-term debt. This may look high, but I believe it is acceptable due to the large number of properties the company owns.
Valuation
Caesars trades at a price-sales ratio of 0.92, which is 39% cheaper than its five-year average.
The GF Value chart indicates a fair value of $95 per share but labels it as a possible value trap due to currently being unprofitable on a GAAP basis and having a weak balance sheet. However, I see it as a value stock as the effects of economic troubles are transient.
2. Las Vegas Sands Corp
Las Vegas Sands Corp. (LVS, Financial) is a casino and resort holding company that owns a variety of prominent properties such as Marina Bay Sands (Singapore) and the Sands Macau (China).
Las Vegas Sands previously owned the Venetian and the Palazzo, but it sold these assets in February 2022. Vici Properties (VICI, Financial) paid a staggering $4 billion for the real estate and Apollo Global Management (APO, Financial) bought the operations for $2.25 billion.
Baron's firm purchased 491,603 shares of the stock during the quarter. Over the course of the three months, shares traded for an average price of ~$56 per share.
Strong financials
Las Vegas Sands reported strong financial results for the first quarter of 2023. Its revenue was $2.12 billion, which beat analyst forecasts by $287 million and rose by a staggering 125% year over year.
I believe this huge growth may have been partially driven by the aforementioned property sale. Either way, Las Vegas Sands' management boasted strong growth in the Macao region as China lifted travel restrictions. This led to higher hotel occupancy, greater gaming volume and higher retail sales.
Management has made it a strategic priority to double down on Asia and abandon slower-growing U.S. markets, and it looks to be paying off. The company has made a further commitment to invest $3.8 billion into the region.
Moving on to profitability, the company reported earnings per share of $0.19, which beat analyst forecasts by $287 million. Its Marina Bay Sands property delivered a staggering $394 million alone.
The business has $6.5 billion in cash and short-term investments on its balance sheet compared to $15.9 billion in total debt, of which $13.9 billion in long-term debt.
Valuation
Las Vegas Sands has a price-sales ratio of 8.36.
The GF Value chart indicates a fair value of $62 per share and thus the stock is “fairly valued” at the time of writing.
3. MGM Resorts International
MGM Resorts International (MGM, Financial) is another popular casino and resort holding company that owns a variety of properties such as the Bellagio Las Vegas, MGM Grand, Mandalay Bay, Luxor and many more. The company also has properties in Macau.
Baron's firm purchased 746,501 shares of MGM Resorts in the first quarter of 2023, during which shares traded at an average price of ~$42.
Solid financials
MGM Resorts International reported solid financial results for the first quarter of 2023. Its revenue was $3.87 billion, which beat analyst forecasts by $268 million and rose by ~36% year over year.
Occupancy rates rose to 92%, which drove a solid 52% increase in food and beverage revenue. Its highest margin “banquet spend” business also grew by a staggering 84% year over year.
BetMGM gaming revenue rose by an incredible 76% year over year to $476 million, as its market share in iGaming was 28% in the U.S.
Over in Asia, MGM China continued to recover with revenue ramping up to 78% of its 2019 levels or $663 million.
Free cash flow was also impressive at $564 million, though this solid result was partially helped by the timing of tax payments.
Moving on to profitability, its adjusted earnings per share was $1.24, which beat analyst forecasts by $1.09. Its operating income increased by 98% year over year.
BetMGM is still operating at a loss of $82 million, but this was partially driven by a strong promotional period related to the Super Bowl and two state launches.
MGM reported $4.5 billion in cash and short term investments on its balance sheet. The company does look to have the highest debt levels of all the companies covered in this post with $32 billion in total, which could be a risk given the rising interest rate environment.
Valuation
MGM Resorts trades at a price-sales ratio of 1.16, which is 34% cheaper than its five-year average.
The GF Value chart indicates a fair value of $61 per share. It does warn of a possible value trap, but my stance on this one is the same as with Caesars.
Final thoughts
Ron Baron (Trades, Portfolio) is known as a “growth stock” investor, and his investments in casino stocks look to be fulfilling the growth criteria surprisingly well. Gambling still offers huge expansion potential as more countries and even U.S. states legalize it and iGaming continues to grow.
Out of the stocks on this list, Caesars trades the cheapest on a price-sales basis, and given the stock has slightly lower net debt levels (minus cash) than MGM, it is my favorite of the three given its iconic properties.
