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Caesars price target cut as inflation and recession fears take hold

Posted: July 19, 2022, 2:30 a.m.

Last update: July 19, 2022, 2:30 a.m.

Shares of Caesars Entertainment (NASDAQ:CZR) are down nearly 59% year-to-date, marking one of the worst performances in the gaming space while raising concerns on Wall Street that that the stock is vulnerable to economic contraction and a potential decline in consumer spending.

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

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

With fears around rising consumption and a balance sheet that many believe is over-leveraged, CZR shares took it on the chin,” writes Wieczynski. “That’s why we believe now is the right time to incorporate a full-fledged recession into our estimates.”

Despite the dramatic revision to analysts’ price forecasts, Caesars stock is up more than 8% late in the session, joining a broader rally in gambling stocks on Tuesday.

Decent risk/reward Caesar despite recession fears

Growing fears of an economic contraction are fueled as the Federal Reserve continues a scorched earth campaign of interest rate hikes to stifle inflation.

All of this is seen as toxic brew for the consumer discretionary sector, where gaming stocks reside. As it stands, some gaming executives say they are already seeing signs of inflation-crimping spending and it is widely expected that more operators will comment on this in upcoming earnings conference calls. second trimester.

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

“Sounds terrible, doesn’t it? Well, even after significantly lowering our estimates for the year, we still see a lot of long-term value and believe CZR shares have overcorrected,” says the analyst.

Revisiting Caesars History

On their own, the aforementioned factors of rising interest rates, persistent inflation and growing recessionary jitters are enough to weigh on any cyclical consumer 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 gaming industry’s biggest burdens — those scenarios are amplified with Caesars. Still, it’s possible the stock has corrected too dramatically, indicating that the investor may want to revisit this story.

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

The analyst adds that Caesars is holding back advertising and promotional spending for its online gaming and online sports betting unit and that it is inconceivable that these businesses are showing negative net worth.