The Federal Reserve is approaching its first interest rate cut in four years, a potential relief for debt-heavy companies like Caesars Entertainment, noted by its NASDAQ symbol, CZR. In an updated report to clients, B. Riley analyst David Bain highlighted the impact of the Fed’s tightening cycle since March 2022, during which Caesars’ shares plummeted 50%, in stark contrast to an average loss of 3% among other casino operators within his coverage. The only comparable performer that fared worse was Penn Entertainment, which saw a 55% drop.
Bain further pointed out that despite these fiscal challenges, Caesars’ estimated earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) for 2024 are projected to be 18% higher than those reported in 2022. Such figures underscore the company’s potential to benefit from prospective lower borrowing costs. Specifically, Bain indicated, “For every 100 basis points reduction in rates, CZR’s interest expense diminishes, increasing free cash flow by $60 million. We anticipate CZR might also refinance its $1.6 billion in 8.125% fixed senior notes next year, contingent on the likely continued decline in rates.”
Some market analysts predict that by the second quarter of the coming year, the Federal Reserve could reduce rates by up to 150 basis points, which would significantly boost Caesars’ free cash flow beyond $60 million before mid-2025.
In 2023, Caesars CEO Tom Reeg mentioned that the company is open to selling non-core assets to ease its debt load, though specifics weren’t provided. Bain speculated that the Linq Promenade, a retail space adjacent to Caesars’ Strip property, could be a potential candidate for sale, potentially generating $700 million in proceeds.
Earlier this year, Caesars took tangible steps in this direction by selling intellectual property rights for the World Series of Poker to investment firm NSUS Group Inc. for $500 million, resulting in an immediate cash injection of $250 million, with the balance expected over five years. Combined with $250 million in capital spending reductions, Caesars’ financial health appears to be on an upward trajectory.
Bain estimates that by the end of next year, Caesars’ net debt to EBITDA ratio could fall below 3.5x, with lease-adjusted debt below 5x. Achieving these financial metrics could provide Caesars the flexibility to repurchase its stock. Bain concluded, “Given the above and an enterprise value/EBITDA valuation of 6.3x, compared to around 10.4x at the time of the Eldorado/CZR merger in 2020, we believe CZR is in a position to begin repurchasing shares, though we anticipate the majority of incoming cash will still be allocated towards debt repayment.”
Notably, the company has $141 million remaining on a previously announced buyback program, strengthening the possibility of strategic stock repurchases moving forward.
 is poised for financial gains with potential Fed rate cuts, promising higher earnings and strategic asset sales to reduce debt.){kind=link}