Posted on: September 17, 2024, 10:45h.
Last updated on: September 17, 2024, 11:27h.
The Federal Reserve is nearing its first interest rate cut in four years, which is none too soon for debt-laden companies such as Caesars Entertainment (NASDAQ: CZR).
In a new report to clients, B. Riley analyst David Bain points out that since the Fed commenced its tightening cycle in March 2022, shares of Caesars slid 50% compared to an average loss of 3% for the casino operators in his coverage universe. The only comparable gaming name that performed worse over that span was Penn Entertainment (NASDAQ: PENN), which tumbled 55%.
Bain also observed that despite the interest rate headwinds, Caesars’ 2024 estimated earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) is 18% higher than the reported 2022 figure. Other data points confirm the gaming company’s leverage to lower borrowing costs.
For every 100 basis points in lowered rates, CZR’s interest expense declines/free cash flow increases by $60 million. We believe CZRs could also look to refinance its $1.6 billion 8.125% fixed senior notes sometime next year, as rates are likely to continue to fall, in our view,” wrote Bain.
Some market observers believe the Fed could pare rates by 150 basis points by the second quarter of next year, implying Caesars could see a larger boost to free cash flow than $60 million before the end of the first half of 2025.
Caesars Can Make it Rain with Asset Sales
Earlier this year, Caesars CEO Tom Reeg said the operator is open to selling noncore assets to raise cash that could be used to reduce its debt burden. He didn’t elaborate on what those assets could be.
Bain speculated that Caesars could consider selling the Linq Promenade, the retail space adjoining that Strip property. Such a transaction could generate $700 million in proceeds, Bain said.
Caesars has already engaged in some sales this year. Last month, it announced the sale of the intellectual property rights associated with the World Series of Poker (WSOP) to investment firm NSUS Group Inc. for $500 million. That results in an immediate influx of $250 million in cash, with the remainder coming in five years.
Combine that with $250 million in capital spending coming off Caesars’ books and the casino giant’s financial position is steadily improving.
Caesars Could Embrace Buybacks
Bain estimates that by the end of next year, Caesars’ net debt to earnings before interest, taxes, depreciation, and amortization (EBITDA) ratio should be below 3.5x with lease-adjusted debt below 5x. Should those objectives be reached, it could give the Harrah’s operator the flexibility to repurchase its stock.
Given the above and an enterprise value/EBITDA valuation of 6.3x (versus ~10.4x at the time of the Eldorado/CZR merger in 2020), we believe CZR is in a position to begin to repurchase shares, though we still expect a vast majority of incoming cash will be used to repay debt,” concluded Bain.
The gaming company has $141 million remaining on a previously announced buyback program.
