Eldorado ‘Ultimate Risk/Reward’ Story Among Gaming Stocks, Could More Than Triple, Says Analyst

Posted on: April 3, 2020, 02:23h. 

Last updated on: April 3, 2020, 03:13h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Few gaming stocks have been bludgeoned as badly this year as has Eldorado Resorts, Inc. (NASDAQ:ERI). But even with all domestic casinos still closed, analysts are defending the Caesars Entertainment (NASDAQ:CZR) suitor, saying the regional gaming company’s stock offers significant upside from current levels.

One analyst is really bullish on Eldorado stock despite mostly bearish treatment on Wall Street. (Image: Reuters)

With speculation swirling about the fate of ERI’s $17.3 billion acquisition of Caesars, both stocks are under pressure, with the former down 82.11 percent year-to-date and 85.64 percent below its 52-week high after slumping 4.78 percent on Friday. Still, some analysts are bullish on Eldorado stock, calling for massive upside from current levels.

We believe ERI is the ultimate risk/reward stock, and based on our analysis, we believe the possible rewards far outweigh the risks that have now been overly priced into shares during the past six weeks,” said Stifel analyst Steven Wieczynski in a note obtained by Casino.org.

The analyst has a “buy” rating on the stock with a $35 price target, one that, if proven accurate, would represent roughly 250 percent upside from Friday’s close at $10.16.

Confident in Caesars Completion

One of the primary overhangs on both ERI and Caesars stocks this year has been chatter that the deal to create the largest US casino operator will be scrapped due to sagging share prices, rising costs, and regulatory headwinds caused by the COVID-19 outbreak.

However, reports to the contrary surfaced earlier this week, with one indicating the transaction could be consummated by June. Wieczynski is confident the marriage will be made official, though he didn’t pinpoint a specific date.

“We absolutely believe the deal to acquire Caesars Entertainment (CZR/NR) will close (timing remains TBD),” said the analyst. “While we understand shares of both ERI/CZR are telling us the market doesn’t believe this deal will close, we see it the other way.”

There is talk that banks still need to move $3 billion in financing for both operators. But even if that doesn’t happen, the lenders are likely to sit on that commercial paper to push the transaction forward. Regulators in Indiana, Nevada, and New Jersey, as well as the Federal Trade Commission (FTC), still need to evaluate the deal, and it’s expected agencies in the Garden and Silver states will do so over the next month.

“Ultimately though we believe the remaining three state gaming boards (IN, NJ, NV) will approve this deal, and based on what we know today, would expect a late-May to mid-June closing time frame,” said Wieczynski.

Strong Conviction

For a stock down more than 82 percent this year, and with a close barely above $10 today, a $35 price 12-month price forecast may seem overly ambitious. But Wieczynski believes there’s a runway for long-term ERI investors to realize even larger gains.

The analyst believes Caesars’ assets are generally strong, while noting a level of comfort with the strength of the Las Vegas Strip, and that ERI will be able to realize its goal of cost savings of $500 million via the purchase.

“Although our $35 12-month target price (21E pro-forma SOTP) shows ~250% upside, we see a fairly defensible path to an even higher share price over time, strengthening our long-term conviction in the name,” he said.