Caesars Estimates Pared Amid Recession Fears, but Risk/Reward Seen as Favorable

Shares of Caesars Entertainment (NASDAQ:CZR) are off almost 59% year-to-date, marking one of the worst showings in the gaming space. That’s sparked concerns on Wall Street that the stock is vulnerable to economic contraction and a potential pullback in consumer spending.

Harrah’s on the Las Vegas Strip. An analyst slashed his price target on Caesars, but still sees upside. (Image: Vegas Means Business)

In a note to clients, Stifel analyst Steven Wieczynski slashes his price target on Caesars to $63 from $113, while reiterating a “buy” rating. He says Caesars is the second-worst performing stock in his coverage this year, a notion that appeared “crazy” at the start of 2022.

With fears around the consumer mounting and a balance sheet that many believe is over-levered, CZR shares have taken it on the chin,” writes Wieczynski. “That’s why we believe the time has come to price a full-blown recession into our estimates.”

Despite the analyst dramatic price forecast revision, Caesars stock is higher by more than 8% in late trading. It joined a broader Tuesday rally in gaming equities.

Caesars Risk/Reward Decent Despite Recession Fears

Escalating fears of economic contraction are being stoked this month. That’s as the Federal Reserve continues a scorched-earth campaign of interest rate hikes to quash inflation.

All of that is seen as a toxic brew for the consumer discretionary sector, which is where gaming stocks reside. As it is, some gaming executives say they’re already seeing signs of inflation crimping spending.  It’s widely expected more operators will offer commentary on that subject on upcoming second-quarter earnings conference calls.

Wieczynski acknowledges that a “dramatic slowdown” in consumer spending and travel could arrive as soon as 2023. As such, he’s trimming Caesars 2023-24 property-level earnings before interest, taxes, depreciation, and amortization (EBITDA) estimates by 18%. On the other hand, it’s not all bad news for the Harrah’s operator.

“Sounds terrible, right? Well, even after significantly cutting our out-year estimates, we still see plenty of long-term value, and believe CZR shares have overcorrected,” says the analyst.

Revisiting Caesars Story

Alone, the aforementioned factors of rising interest rates, persistent inflation, and increasing recession jitters are enough to weigh on any consumer cyclical stock. The sector is one of the worst-performing groups this year.

With $13.5 billion in debt at the end of the first quarter — one of the largest burdens in the gaming industry — those scenarios are amplified with Caesars. Still, it’s possible that the stock has corrected too dramatically, indicating that investors may want to revisit this story.

“Our revised $63 price target still shows ~63% upside from current levels. Even after pricing in a full-blown recession, we believe CZR’s core operations are worth ~$42/share. With shares still trading south of $40/share, we believe the risk/reward is too good to pass up at this point,” concludes Wieczynski.

The analyst adds that Caesars is reining in advertising and promotional spending for its iGaming and online sports wagering unit. He noted that it’s inconceivable that those businesses should sport negative equity value.

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