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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. Anyone who has visited the US gambling mecca of Las Vegas recently can attest that pure gambling activity has taken a backseat to other entertainment options there. There are more shopping, dining and live entertainment options than ever and the casino is no longer the focus of the multi-billion dollar resorts that are being built.

It’s actually an incredible success story for Las Vegas casino operators. Gambling was once legal only in the state of Nevada (and a small part of New Jersey) and Las Vegas had a monopoly as the go-to destination for serious gamblers. Profits soared.

Over the past 20 years however, many states have made various forms of wagering legal and the average American can drive to a casino to bet their money much more easily than they can book a flight to “sin city.”

While overall commercial gaming revenues in the US hit an all-time high of $41.7 billion in 2018, the proliferation of gambling venues all over the country means the pie is being split more ways than ever and smaller operators are seeing a reduction in gambling profits, often after having made expensive investments.

The slowdown is evident in a string of mostly poor results from Eldorado Resorts Inc (ERI), the operator of 26 unique properties in 12 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.

(That same heavy focus on gambling used to be the dominant model in Las Vegas as well, but resorts there now make significant profits on lodging, food and beverage and other attractions rather than basically giving them away.)

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.

In 2019, Eldorado announced a deal in which they will purchase Caesars Entertainment (CZR) in a bid to compete with larger Las Vegas operations like Wynn Resort (WYNN) and Las Vegas Sands (LVS). Caesars emerged from Chapter 11 bankruptcy just two years ago after its own struggles in the new era of gambling.

The cash and stock deal is worth approximately $17B including Eldorado’s assumption of Caesar’s $8.8B in debt.

The deal is expected to close early in 2020.

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 in 2019 despite several earnings misses, but the recent rally looks to be in jeopardy.

Recent downward earnings revisions for full-year 2019 and 2020 earn Eldorado Resorts a Zacks Rank #5 (Strong Sell). The Caesar’s deal adds so much debt to the ERI balance sheet that their ability to compete in the competitive gaming space is being seriously questioned by analysts.

The gaming industry is currently a tough spot for investors but there are a few standouts, including  English Bookmaker William Hill , currently a Zacks rank #2 (BUY).

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