Caesars vs. MGM: What's the Better Way to Bet on Casino Giants?

Key Points

• MGM and Caesars are the two largest casino operators on the Las Vegas Strip, but these companies aren’t twins.

• For risk-tolerant investors, Caesars could be a play on declining interest rates and possible corporate transactions.

• MGM could entice long-term investors as it offers the superior expansion roster.

• 10 stocks we like better than MGM Resorts International ›

MGM Resorts International (NYSE: MGM) and Caesars Entertainment (NASDAQ: CZR) are the giants of the Las Vegas of the Strip, combining to operate 18 casinos there.

Both companies also have footprints in other "destination" markets, such as Atlantic City, N.J., and expansive portfolios of regional casinos. In fact, Caesars runs more than 50 North American gaming venues.

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The duo is also prominent in iGaming and online sports betting. It appears Caesars and MGM have a lot in common and they do, but those similarities don't imply investors are signing up for comparable returns. Don't bet on it.

For the five years ending Sept. 19, MGM stock gained 55.25%. Its rival shed 53.85%. A massive chasm. And while past performance isn't a promise of future returns, this pair could continue traveling different paths. Let's explore why.

Caesars has a lot of moving parts

With casino stocks, the path to investing success isn't linear. Caesars proves as much. That doesn't mean it's a "bad" stock, but a lot needs to go right for investors to be rewarded. Banished from the S&P 500 Index, Caesars is a play on lower interest rates for a variety of reasons.

It had $12.27 billion in outstanding liabilities at the end of June, some in variable form, meaning lower interest rates help. By one estimate, the company could save $60 million annually for every 100 basis point the Federal Reserve shaves off rates.

Lower rates matter for other reasons. Cash devoted to covering interest expenses makes a dividend a far-flung while weighing on the operator's to repurchase more stock.

The company also needs to shed some assets to reduce debt – something management has said it's open to – but there aren't many cash buyers out there. Translation: Prospective acquirers likely need to finance purchases and may be reluctant to do so until the Fed cuts more.

Regarding potential transactions, perhaps the simplest, most lucrative path for Caesars to traverse is spinning off its digital unit. Management is open to that, too, expressing frustration that segment's improvements aren't reflected in the share price. It's a viable move because an analyst recently said the online business is worth more than the entire company .

Wow, that is a lot of moving parts!

MGM has cleaner investment thesis

Among hospitality stocks, MGM isn't perfect, but it offers a simpler investment thesis than Caesars. That could be appealing to a broader investor base. Here's the tale of the tape.

As of June 30, MGM's long-term debt stood at $6.20 billion -- far lower than Caesars' liabilities. MGM is also a buyback powerhouse. It's shrunk its shares outstanding by a jaw-dropping 45% since 2021 .

Next up is geography. MGM owns 56% of MGM China, which runs two integrated resorts in Macau. Caesars isn't there. MGM also has gaming space set aside at an under construction resort in the United Arab Emirates (UAE). If regulators there approve another casino license, the company could be in the catbird's seat to procure that permit. The company has also expressed interest in Thailand.

Sure things outside the U.S. include a $10 billion casino hotel in Osaka, Japan. Scheduled to open in 2030, MGM Osaka could be one of the world's highest-grossing gaming venues, potentially outpacing some comparable properties elsewhere in Asia .

Global growth is hard to come by, but MGM has some exposure to ex-U.S. markets, is adding it in Japan and could pursue related opportunities elsewhere. Conversely, international expansion isn't on Caesars' radar.

In the U.S., MGM is a leading contender to land one of three New York City-area casino licenses – a competition from which Caesars was recently booted .

Which casino stock comes up aces?

Settling the Caesars vs. MGM debate produces different answers for different investors. There are times, some encouraged by Fed easing, when indebted, flawed companies rally. Such a scenario would augur well for Caesars.

Casino stocks aren't necessarily "conservative" investments, but MGM is the more prudent selection of the duo. Lower debt and elevated share repurchases are switches Caesars can't flip on, but MGM can and is.

Mix in MGM's established and upcoming international exposure and short odds of winning a New York license, and its longer-term outlook is arguably brighter and less risky than Caesars'.

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Todd Shriber does not own shares of the stocks mentioned in this article. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.