Caesars Downgraded, Price Target Slashed as Analyst Sees Underperformance Continuing

Posted on: July 15, 2024, 04:06h. 

Last updated on: July 15, 2024, 04:06h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Shares of Caesars Entertainment (NASDAQ: CZR) slipped almost 2% today on above-average volume after Susquehanna analyst Joseph Stauff downgraded the gaming stock.

Caesars F1
Caesars Palace Las Vegas. An analyst downgraded operator Caesars Entertainment, citing a widening gap between it and rival MGM. (Image: CNN)

In a note to clients, Stauff pared his rating on the Harrah’s operator to “negative” from “neutral” while slashing his price target on the shares to $33 from $44. That’s well below Caesars’ closing price of $39.22 today. The analyst believes Caesars is likely to continue lagging rival MGM Resorts International (NYSE: MGM).

MGM and Caesars are the two largest operators on the Las Vegas Strip. Over the past year, shares of the latter slumped 27.46% while the former lost 5.80%. Year-to-date, the Bellagio operator is up 3.29%. While that lags the S&P 500 by a wide margin, it’s still far superior to the 16.34% loss notched by Caesars since the start of 2024.

Caesars has enjoyed the support of some well-known investors this year, but that’s not enough to convince Stauff to be bullish on the casino giant. Assuming “negative” is the equivalent of a “sell” rating, Stauff is the only one of the 18 analysts covering Caesars to rate it in such fashion while 14 of his colleagues rate the stock the equivalents of “buy” or “strong buy.”

‘Growing Disparity’ Between Caesars, Rivals

The Susquehanna analyst observed that second-quarter regional casino data suggest a “growing disparity” between Caesars and rivals. It’s possible that could be a point of discussion on the operator’s earnings conference call on July 30.

Over the course of this year, some analysts and gaming companies themselves have mentioned reduced consumer spending among some guests in select regional casino markets. Stauff said Caesars more than MGM is vulnerable to that trend because Caesars’ portfolio is “notably disadvantaged” due to its “lower-end customer base and lower-quality assets.”

Those could be among the reasons Caesars has expressed a willingness to consider divesting what it describes as “non-core, non-operating” casinos that currently deliver little value to its overall portfolio.

Stauff also noted that there’s a growing gap between MGM and Caesars on the Strip. The analyst said the Horseshoe operator hasn’t invested as much in Las Vegas as it probably should have because it’s directed capital to digital gaming and regional casinos, but MGM has made substantial investments in its Sin City portfolio.

Debt Reduction Could Help Caesars

Clearly, Stauff has a pessimistic view on Caesars, but it’s not widely shared and the operator could give investors reason to cheer if it shows material progress on debt reduction or announces asset sales that could assist in that endeavor.

We believe elevated financing costs in the market have caused concerns over Caesars’ high debt levels; we forecast the company’s debt to adjusted EBITDA at 6.1 times in 2024,” noted Morningstar analyst Dan Wasiolek. “This has presented an opportunity to own shares of a company with a management team that has been solid stewards of capital, as cash flow returns from strategic tie-ups were used to quickly pay down debt versus shareholder returns via dividends or share repurchases, which we believe is prudent.”

At the end of the first quarter, Caesars had $12.436 billion in outstanding liabilities compared to $12.439 billion at the end of 2023.