Caesars Stock Contends with Downgrade Despite Earnings Beat

Caesars Entertainment (NASDAQ:CZR) delivered estimate-beating third-quarter results on Tuesday. While analysts are mostly upbeat about the report, there’s at least one dissenting voice.

In a note to clients today, CFRA Research Arun Sundaram downgraded Caesars stock to “hold” from “buy” while paring his 12-month price target on the shares to $35 from $40. That implies a significant downside from today’s closing handle around $44.

We now see limited upside to shares as the economic backdrop weakens and we expect travel demand to fall in 2023, leading to operating profit lower than their interest payments,” wrote the analyst.

Recent GDP data suggest the US economy is already meeting the traditional definition of a recession — two consecutive quarters of negative growth. The third-quarter report showed negligible growth. While the gaming industry isn’t yet reflecting a recession, some Wall Street banks and economists are forecasting the arrival of economic contraction in 2023.

CFRA Concerned About Recession

Broadly speaking, Caesars’ third-quarter results were solid. The casino giant said the October performance was the best in company history, indicating the current quarter is off to an impressive start. However, CFRA’s Sundaram highlights some potentially concerning data points.

“CZR’s Las Vegas segment same-store sales grew 5.9% year-over-year in Q3, while its Regional segment was flat, with adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) down 4% in Las Vegas and up 3% for its Regional segment,” noted the analyst.

Caesars is the second-largest operator on the Las Vegas Strip, meaning there is an element of economic sensitivity with the stock. However, Caesars management remains bullish on the Strip and its regional properties, saying they see no signs of softening demand.

The gaming company further impressed analysts and investors by reporting that its digital unit, which includes Caesars Sportsbook, lost just $38 million in the September quarter. That’s compared with a year-earlier loss of $164 million.

CFRA Says Asset Sale Still Necessary

In a mild surprise, Caesars management told analysts yesterday it will not move forward with selling one of its Las Vegas Strip assets. Coming into this year, the investment community widely viewed such a move as essential to the operator’s efforts to pare debt. Sundaram says asset sales are still necessary for Caesars.

“In our base case, we expect the company to sell off assets in order to pay down debt and make interest payments in 2023, and at best, the company will make enough operating profit to pay interest on its debt. We see other opportunities in the gaming space with less risk,” according to the analyst.

Even without the benefit of an asset sale, Caesars lowered its liabilities to $13.3 billion as of Sept. 30, down from $13.7 billion at the end of the second quarter.