Caesars Downgraded, Waning Confidence in Casino Growth, Says Analyst

• Slumping stock downgraded by Jefferies
• Confidence in land-based casino growth is “low,” says analyst
• Caesars could be forced to raise capital

Already mired in a lengthy slump, shares of Caesars Entertainment (NASDAQ: CZR) faltered anew on Tuesday after a sell-side analyst downgraded the stock.

In a new report to clients, Jefferies analyst David Katz lowered his rating on the gaming stock to “hold” from “buy,” citing the operator’s disappointing third-quarter results and the likelihood that brick-and-mortar casino earnings have yet to reach a nadir, among other factors.

We do not relish a downgrade for CZR with the shares down 40% year-to-date, but our reasons for upside have progressively diminished. Land-based gaming earnings have not found a bottom and may not have yet,” observes Katz. “Digital gaming growth expectations have also diminished, which defers the possibility of meaningful value capture.”

Katz slashed his price target on Caesars to $22 from $39, with that new forecast implying upside of about 10% from where the stock currently resides.

Caesars May Need to Raise Capital

Saddled with $11.9 billion in debt and junk credit ratings, Caesars could be faced with the specter of having to raise capital. If it has to do so, it would assuredly be subject to high interest rates due to its elevated debt levels and flimsy credit grades.

The company could also be confronted with spending if it’s able to reach a resolution with VICI Properties (NYSE: VICI) on the regional casino master lease. That issue has been a point of emphasis for shareholders in both companies and an overhang on both stocks.

“A solution to the elevated rent levels in the VICI regional master lease is probable, but likely to cost CZR capital, one way or another. In the end, we believe the likelihood the set-up gets worse for CZR is equal to the prospects for an upside surprise, with the outcome requiring outside forces,” adds Katz.

Caesars Might Not Find Digital Salvation

One of this year’s more prominent rumors in gaming circles is the possibility that Caesars would spin off its digital unit, which includes Caesars Sportsbook, as a way of generating value for shareholders. Management has previously said it believes the share prices don’t adequately reflect strides made in the online business.

“Digital gaming growth expectations have also diminished, which defers the possibility of meaningful value capture,” concludes the analyst.