Why Caesars Entertainment Corporation’s Shares Plunged 24.3% After Reporting Earnings

What happened

Shares of Caesars Entertainment Corporation (NASDAQ: CZR) fell as much as 24.3% on Wednesday after reporting second-quarter 2018 results. The stock cratered to its low mid-day and recovered slightly to end the day down 14.8%.

So what

Revenue was $2.1 billion in the quarter, in-line with analyst expectations. But earnings of $29 million, or $0.04 per share, fell short of the estimate of $0.08 per share.

Image source: Getty Images.

What really sent shares lower was management’s comments about competitive pressures on room rates. CFO Eric Hession said there was “softening” of demand in July and August, which caused management to be cautious on 2018 guidance. Still, they didn’t change the expected 4% to 6% revenue per available room growth guidance for the full year, indicating that the slowdown could be temporary.

Now what

Caesars’ recovery is predicated on growing steadily in the U.S. and reducing leverage on the balance sheet. So, any slowdown in room growth or casino gambling will spook investors, which is what happened yesterday.

Management indicated that the slowdown this summer is likely due to a weak event schedule, which will turn around in the fourth quarter, so this sell-off may be an overreaction to short-term events. Watch for room revenue growth guidance after the third quarter and if growth returns the company should be in good shape, moving past a tough couple of months in Las Vegas.

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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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