Eldorado Lands Higher Price Target as Analyst Lauds Regional Efficiencies

Posted on: July 18, 2020, 02:26h. 

Last updated on: July 20, 2020, 11:22h.

Todd Shriber @etfgodfather Read More

Expertise: Financial, Gaming Business, Mergers and Acquisitions.

As it nears completion of its acquisition of Caesars Entertainment (NASDAQ:CZR), Eldorado Resorts (NASDAQ:ERI) remains one of the preferred gaming equities among sell-side analysts. Wolfe Research analyst Jared Shojaian recently boosted his price forecast on the soon-to-be casino behemoth.

In lifting his price target on Eldorado to $63 from $56, Shojaian highlights the strength in regional gaming properties, particularly those operated by Caesars, following the recent coronavirus reopenings.

We knew trends were performing well, but the data is impressive and still better than we expected, and so we raise estimates and our target price,” said Shojaian.

In a recent filing with the Securities and Exchange Commission (SEC), Caesars said revenue at its regional casinos that were open in May and June jumped nine percent to 11 percent year-over-year. That offset some of the weakness in the destination markets of Las Vegas and New Orleans.

Sizing Up Sustainability

The critical question for regional operators, particularly the combined ERI/Caesars, which will control 52 gaming venues in 16 states, is how sustainable the strength is in these markets.

Shojaian notes regional casinos are being propped up by operators’ ability to increase margins and factors things gaming companies can’t control, including government stimulus checks and a dearth of local entertainment options in the wake of COVID-19.

“Consumers have received temporary stimulus relief and supplemental unemployment insurance, and many unemployed consumers now have more spare time with less alternatives for leisure activities,” the analyst said.

Capacity discipline has also been forced on the operators through social distancing mandates, so the supply environment is tight, and promotional behavior is limited,” he continued. “Therefore, we think regional demand may cool some, but we also expect destination demand to slowly improve over time, perhaps providing an offset.” 

Analysts are favoring regional operators, saying that the venues run by those companies will recover more rapidly than destination market equivalents because many tourists are still reluctant to fly. Shojaian sees some of the margin expansion that’s buoying regional companies today retreating a bit as capacity increases.

“From a margin perspective, we do believe the industry will operate at margins above pre-COVID levels over the longer term, given some permanent changes. But the current record levels feel unsustainable to us,” said the analyst. “Eventually, more capacity will come online, and the industry will become more competitive, we think.”

Deal Almost Done

Perhaps surprisingly, shares of ERI slumped 6.79 percent on more than double the average daily volume on Friday — the day it was announced that New Jersey regulators approved the company’s $17.3 billion acquisition of Caesars. That was the last regulatory hurdle to clear, indicating the deal could be finalized by the end of July.

Still, Shojaian is bullish on Eldorado.

“We raise our pro forma estimates and we raise our ERI YE21 target price from $56 to $63, which is based on our pro forma sum of the parts,” he said.

That forecast implies an upside of almost 66 percent from where ERI stock closed on Friday.