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Bear of the Day: Eldorado Resorts (ERI)

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Gaming stocks have had a rough of late with occupancies and gambler visits sliding. Some of the big casino operators are getting a boost in revenues on the island of Macau as the Chinese economy and equity markets heat back up, but solely US companies are still suffering the effects of intense competition.

The slowdown is evident in the latest quarterly report from Eldorado Resorts Inc (ERI), the operator of 28 unique properties in 13 US states. Gambling revenues are the main source of revenues at the properties, while accommodations, restaurants, entertainment and other amenities are utilized to attract gaming customers.

Eldorado’s casinos are primarily in smaller markets adjacent to urban centers and nine of its casinos were acquired during an M&A binge in 2018. The total cost was just a hair over $1.2B. In fact, all but 7 of Eldorado’s properties were acquired in the past two years. That also means that total debt at the company increased from $800M at the end of 2016 to $3.26B at the end of 2018.

Eldorado separates its properties into five regions for reporting and four out of the five saw declines in revenues during the fourth quarter of 2018 – West, down 1.7%, Midwest, down 1.9%, Central, down 0.8% and South down 5.9%. Only the East saw an increase in revenues, up 2.8%.

Eldorado also has a long history of missing the Zacks Consensus Earnings Estimate, shown in the Price, Consensus and Surprise chart below as red arrows. ERI shares took a big hit in the second half of 2018, shedding half their value. They recovered sharply in 2019 until the latest miss and the recent rally looks to be in jeopardy.

Recent downward earnings revisions earn Eldorado Resorts a Zacks Rank #5 (Strong Sell).

The gaming industry is currently a tough spot for investors but there are a few standouts, including PlayAGS (AGS - Free Report) , a manufacturer of electronic gaming machines and a Zacks Rank #1 (Strong Buy) and Churchill Downs (CHDN - Free Report) , operator of the iconic racetrack that’s home to the Kentucky Derby as well as the country’s leading online gaming business. CHDN is currently a Zacks rank #2 (Buy).

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