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Why Caesars Entertainment Corporation Stock Dropped 11% in March

By Travis Hoium – Apr 6, 2018 at 11:57AM

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Worries about consumer spending hit this gaming stock last month.

What happened 

Shares of gaming giant Caesars Entertainment Corporation (CZR) fell 11.4% in March, according to data provided by S&P Global Market Intelligence, as investors became unsatisfied with earnings and a potential slowdown in consumer spending. The decline was part of a broader sell-off in consumer discretionary stocks, but there are some reasons Caesars fell double digits while other gaming companies didn't. 

So what 

Fourth-quarter earnings reported in March showed net revenue falling slightly to $1.96 billion and adjusted earnings before interest, taxes, depreciation, amortization, and restructuring or rent (EBITDAR) -- a proxy for cash flow from resorts -- was flat at $505 million. The results were in line with a slight decline in Las Vegas Strip gaming revenue, but it's worrisome that gaming and overall revenue at Caesars isn't growing when the economy is doing fairly well

Panoramic of Las Vegas Strip.

Image source: Getty Images.

What really sent shares lower late in the month was a broader sell-off on Wall Street that hit discretionary consumer stocks harder than the rest of the market. Investors fear that trade tariffs and rising interest rates will squeeze consumer spending, reducing funds available for gambling or vacations to Las Vegas. If consumer spending is flat now and we aren't yet seeing the effects of a slowing economy or any tariff impacts on consumers, there's a lot of uncertainty for the future. The gaming business can turn south quickly if the economy slows down, something we've seen as recently as the last recession, and that has to be a concern for investors right now. And the fact that Caesars doesn't have exposure to the lucrative Asian gaming market makes it more reliant on the U.S. economy than most of its peers. 

Now what 

There's nothing that's a big red flag for Caesars right now, but the daily swings of the market indicate that investors are getting worried about the economy going forward. Additionally, an escalating trade war with China could hamper people's ability to spend in casinos. Given the economic uncertainty, I wouldn't take a risk on Caesars' stock until the Las Vegas Strip starts to show some signs of growth. 

Travis Hoium has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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