Caesars Downgraded, as KeyBanc Sees Macro Concerns for Leisure Stocks

Caesars Entertainment (NASDAQ:CZR) is dealing with a downgrade today, as another research firm cites macroeconomic risks as a potential drag on leisure stocks.

In a note to clients, KeyBanc analyst Brett Andress downgrades Caesars to “sector weight” from “overweight,” while broadly recommending reduced exposure to gaming equities. Andress stops short of calling for a sequel to the global financial crisis of 2008-09 on the Las Vegas Strip. But he notes that if such an ominous scenario materializes, Caesars would be among the most vulnerable names.

Macro; high leverage and commensurate free cash flow (FCF) burden vs. peers,” writes the analyst.

With $13.5 billion in debt at the end of the first quarter, the Harrah’s operator carries one of the largest burdens in the gaming industry.

Caesars, Others Could Be Crimped by Inflation

KeyBanc’s downgrade of Caesars arrives on the same day the Labor Department said the Consumer Price Index (CPI) jumped 9.1% in June. That was more than expected and represents another new four-decade high.

“With the hot month-over-month and year-over-year numbers coming in as they have, this tells the Federal Reserve it has more work to do with higher interest rates to eventually achieve its mandate of stable prices, or lower inflation, in this case. Look for another rate increase of as much as 75 basis points at the FOMC meeting at the end of this month,” said Bankrate Senior Economic analyst Mark Hamrick.

Rising interest rates drag on heavily indebted companies — a box Caesars clearly checks. However, the Horseshoe operator is prioritizing debt reduction, and could soon announce an asset sale in Las Vegas to that effect.

Caesars Not Alone

Caesars isn’t the only leisure stock that KeyBanc downgraded today. Nor is it the only gaming name the research firm has reservations about.

Deutsche Bank analyst Carlo Santarelli cuts price forecasts on Boyd and Red Rock, as well as Golden Entertainment (NASDAQ:GDEN). All three are heavily dependent on the Las Vegas locals market, which Santarelli says touched its cyclical peak, but “remains healthy.”