Published on: September 17, 2024, 10:45h.
Updated on: September 17, 2024, 10:45h.
The Federal Reserve is approaching its initial interest rate reduction in four years, making it a timely move for companies burdened with debt such as Caesars Entertainment (NASDAQ: CZR).
B. Riley analyst David Bain highlighted in a recent report to clients that since the Fed began raising rates in March 2022, Caesars’ stock has declined by 50%, significantly more than the 3% average loss for other casino operators in the analyst’s coverage group. The only gaming company that performed worse in this period was Penn Entertainment (NASDAQ: PENN), which dropped by 55%.
Bain also noted that despite facing challenges from interest rate hikes, Caesars’ estimated 2024 EBITDAR is 18% higher than the reported 2022 figure, indicating the company’s potential for benefiting from lower interest rates.
“For every 100 basis point reduction in rates, CZR’s interest expense decreases/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 analysts anticipate that the Fed could cut rates by 150 basis points by the second quarter of next year, suggesting that Caesars could see an even greater boost to free cash flow than $60 million before the first half of 2025 ends.
Caesars Can Generate Funds through Asset Sales
Earlier this year, Caesars CEO Tom Reeg mentioned that the company is willing to sell non-core assets to raise funds and reduce its debt burden, although specific assets were not disclosed.
Bain speculates that Caesars could potentially sell the Linq Promenade, a retail space adjacent to their Strip property, which could bring in proceeds of $700 million.
Caesars has already engaged in some asset sales this year, including the sale of the intellectual property rights related to the World Series of Poker (WSOP) for $500 million to NSUS Group Inc. This sale has provided an immediate cash infusion of $250 million, with the remainder to be paid over five years.
Along with $250 million in capital spending coming off Caesars’ balance sheet, the company’s financial position is steadily improving.
Caesars Could Consider Share Buybacks
Bain predicts that by the end of next year, Caesars’ net debt to EBITDA ratio will be below 3.5x and lease-adjusted debt will be below 5x, potentially giving the company the flexibility to repurchase its own 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 company still has $141 million remaining on a previously announced buyback program.