Eldorado Resorts, Inc. (NASDAQ:ERI) is one of the most impressive stories among gaming stocks in 2019. The shares are up 7.59 percent this month and nearly 27 percent since the start of the current quarter. But some analysts believe there’s more to come for the regional gaming company.
Earlier this week, Deutsche Bank analyst Carlo Santarelli reiterated a “buy” rating on the stock, helping stoke a rally that has boosted shares of the buyer of Caesars Entertainment Corp. (NASDAQ:CZR) by 5.70 percent over the past five days. The S&P 500 is up 1.64 percent over the same period.
The CZR portfolio is likely to bring … growth for the combined entity into the double digits,” said Santarelli, one of Wall Street’s most respected gaming analysts, in a note.
In June, Eldorado announced a $17.3 billion takeover offer for Caesars. That deal, which will create the world’s largest casino operator in terms of number of venues, is expected to be completed in the first quarter of 2020.
The Deutsche Bank analyst anointed Eldorado as his top pick among gaming equities for 2020. He also put a $65 price target on the stock, implying upside of about 18 percent from where it trades at this writing.
Net-net, we believe ERI will benefit from sector leading same-store EBITDAR growth, driven by: 1) a healthy LV Strip backdrop, 2) sound regional consumer trends and 3) more limited competition, relative to 2019,” said Santarelli.
With the acquisition of Caesars, Eldorado gains its initial exposure to the Las Vegas Strip where the former operates Caesars Palace, Bally’s, and the Flamigo, among other well-known venues. Eldorado currently runs 23 gaming properties, and its Nevada footprint is concentrated in the Lake Tahoe/Reno area.
Bullishness on Eldorado shares is a pronounced theme these days. At the end of the third quarter, 44 hedge funds, nearly double the amount in the year earlier period, held long positions in the stock.
Santarelli sees other benefits to the Eldorado/Caesars marriage, including “some company-specific dynamics within both the ERI and CZR portfolios that have been unheralded to date.”
One of the primary reasons analysts and investors have grown enthusiastic about Eldorado following news of the Caesars takeover is the expectation that the acquirer will be able to substantially reduce, thereby significantly boosting free cash flow (FCF).
“Given our pro forma modeling work and our available upon request ERI / CZR combined model, we believe these attributes are being valued at a material discount to peers, with shares offering a ~16% pro forma free cash flow yield on our 2021 estimates,” according to Santarelli.
If that 16 percent FCF yield is realized, that would put the combined company ahead of its average gaming industry peer by several hundred basis points.