Caesars Entertainment is poised to outshine its competitors in the gaming industry as the Federal Reserve gears up to relax its monetary policy as early as this week, according to insights from B. Riley Securities reported in a recent note. This strategic shift has profound implications for the financial landscape, particularly for companies like Caesars, which is expected to leverage these changes to enhance its financial performance. Since the Federal Reserve initiated its series of interest rate hikes in March 2022, intended to combat steadily rising inflation, shares of the resort and casino operator have faced considerable turbulence, witnessing a substantial decline of nearly 50%.
In stark contrast, the Russell 2000 index has experienced a modest increase of approximately 7.8% within the same timeframe, while the average stock prices of industry peers have depreciated by 3%. B. Riley pointed out that the Federal Reserve has cumulatively elevated its policy interest rate by 525 basis points from March 2022 through July 2023. A key finding from B.
Riley's analysis highlights that for every 100 basis points in reduced interest rates, Caesars Entertainment's interest expenses are projected to decrease significantly, translating into an uplift of roughly $60 million in its free cash flow. This substantial financial windfall positions Caesars favorably as the Fed shifts its narrative from increasing to decreasing interest rates.
Analyst David Bain emphasized, "As the (Fed) narrative moves from rising to declining interest rates, we believe Caesars Entertainment's stock should emerge as the premier beneficiary within the gaming sector." The anticipation builds as the Federal Open Market Committee (FOMC) embarks on a two-day meeting this Tuesday, with a pivotal announcement regarding its benchmark lending rate expected by Wednesday.
Current analyses reveal a 63% likelihood that the FOMC may opt for a 50-basis-point cut, while the remaining probability favors a more conservative 25-basis-point reduction, according to the CME FedWatch tool. Bain further elaborated on Caesars' potential for refinancing its existing $1.6 billion 8.125% fixed senior notes in the coming year, a move that could be more advantageous as interest rates continue on a downward trajectory.
The brokerage anticipates that capital expenditures may witness a favorable reduction of approximately $250 million by the year 2025. Moreover, forecasts for Caesars' core earnings in 2024 suggest a significant uptick, with estimates positioning them 18% higher than the figures recorded in 2022, bolstering confidence in the company's recovery trajectory, according to B.
Riley's report. In contrast, the financial outlook appears grim for some competitors. Penn Entertainment's stock plummeted a staggering 55% over the past two and a half years, with 2024 earnings estimates reflecting a drastic 78% decline from the actual figures reported in 2022. Meanwhile, MGM Resorts International has witnessed a 14% fall in its stock, coinciding with a slight 3% dip in its current year EBITDA estimates. As the market braces itself for the Federal Reserve's announcements, Caesars Entertainment stands ready to capitalize on the impending shifts in monetary policy, potentially solidifying its position as a leader in the gaming sector going forward..