Posted on: October 12, 2022, 04:20h.
Last updated on: October 12, 2022, 04:46h.
Amid rising interest rates and slumping equity prices, the likelihood of Caesars Entertainment (NASDAQ: CZR) selling one of its Las Vegas Strip assets this year is rapidly diminishing. But the stock isn’t without catalysts, according to one analyst.
Following meetings with Caesars management at the Global Gaming Expo (G2E), Stifel analyst Steven Weieczynski comes away with the sentiment that the Strip asset sale is likely on hold for the time being. But that’s not overly concerning, and there’s possible upside to third- and fourth-quarter estimates. He cites the gaming company’s free cash flow (FCF) capabilities as a positive catalyst for the shares.
Overall the tone of management was very positive, and we believe the market continues to discount the long-term FCF potential of CZR’s brick & mortar business and ability to delever this company even without asset sales,” wrote Wieczynski.
The analyst adds that Caesars management remains bullish on both the Strip and its regional properties, saying that they see no signs of softening demand. However, the stock is down 62.38% year-to-date, as investors fretted about the specter of recession and the impact of rising interest rates on the debt-laden casino behemoth.
Caesars Asset Sale Nice, But Unlikely Near-Term
Entering 2022, the prevailing wisdom held that Caesars would announce the sale of one of its Strip properties in the first half of the year. As the months passed, speculation largely centered around Flamingo and a possible $1 billion price tag.
However, those passing months also included five interest rate hikes by the Federal Reserve, a bear market in stocks, and creditors eschewing risky loans. Those are among the factors hindering Caesars’ ability to move a Las Vegas property.
Specific to the gaming company, investors were excited about a Las Vegas divestment, because the Harrah’s operator needs to trim leverage, as highlighted by its $13.7 billion in liabilities.
“Based on where shares are trading today, we believe the LV asset sale premium has been totally removed,” added Wieczynski. “While disappointing that an asset probably won’t get transacted in the near-term, which would have been a huge deleveraging catalyst, we believe CZR is making the correct call here and is willing to hold their Strip assets until capital markets cool down and prospective buyers can obtain financing at more appropriate rates.”
Free Cash Flow Can Carry Day for Caesars
While there is disappointment around Caesars not unloading a Las Vegas property, particularly among bondholders that want to see the operator’s debt level decline, the company’s FCF-generating capabilities could be an important form of recession protection.
“Leverage will continue to be the number one overhang on this story, but we believe CZR can still produce ~$1B in FCF even in a recessionary environment,” noted Wiecznski.
The analyst added Caesars Sportsbook could “be a nice surprise” on third-quarter earnings. But he’s still forecasting losses for that unit.
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