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, which is more than expected and represents another new four-decade high.
With consumers feeling inflationary pressures on multiple fronts, including essentials such as food, fuel and housing, cutting back on discretionary spending is a reasonable way to deal with those higher prices. That could pinch casino operators, some of which are already acknowledging signs of visitors reining in spending. Persistent inflation could also compel the Federal Reserve to accelerate its interest rate-hiking plans.
“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 are drags 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.
The bank trimmed price targets on Boyd Gaming (NYSE:BYD), Churchill Downs (NASDAQ:CHDN) and Red Rock Resorts (NASDAQ:RRR). Boyd goes to $70 from $78 while Churchill moves to $280 from $300 and Red Rock drops to $45 from $60.
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.”
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