Eldorado Enthusiasm: Analyst Forecasts Epic Move in Stock After Caesars Deal

Posted on: July 3, 2019, 02:58h. 

Last updated on: July 3, 2019, 02:58h.

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

In June, Eldorado Resorts, Inc. (NASDAQ:ERI) said it is acquiring Caesars Entertainment Corp.(NASDAQ:CZR) for $17.3 billion, a purchase that is being met mostly with enthusiasm among analysts and investors.

The pool at Caesars Palace. Eldorado’s acquisition of Caesar’s could be a boon for the buyer’s stock, says one analyst. (Image: Trip Advisor)

While there has been chatter that Eldorado is overpaying for the operator of casinos under the Caesars, Harrah’s and Horseshoe brands, among others, analysts see significant long-term benefits for the company post-acquisition.

In a recent research note obtained by Casino.org, Deutsche Bank gaming and leisure analyst Carlo Santarelli raised his price target on Eldorado shares to $74 from $56, implying upside of more than 50 percent from Wednesday’s close around $49.

Santarelli’s Eldorado enthusiasm echoes a familiar refrain: the company’s ability to generate free cash flow after it brings Caesars into the fold.

While ERI paid more than we had estimated in our deal analysis, we continue to believe the combined entity, from a financial perspective, harmonizes nicely and throws off considerable free cash flow, which, if valued properly relative to peers, implies meaningful upside in shares,” said the analyst.

The deal is expected to close in the first half of 2020 with Eldorado management running the combined company under the Caesars name.

A Shrewd Move

On the day the offer for Caesars was made public, Eldorado also revealed it’s selling three Harrah’s venues to VICI Properties Inc. (NYSE:VICI) for $3.2 billion, a transaction Santarelli believes may not be fully appreciated when naysayers critique the $17.3 billion price tag for Caesars.

“As it pertains to the higher purchase price, we would also note that our analysis did not contemplate the $3.2 bn, value creating, cash injection from VICI,” said the analyst.

Eldorado is voluntarily selling those Harrah’s casinos and while it is likely there will be more divestments, Santarelli believes it is noteworthy that the regional gaming company currently is not being forced to shed assets as part of its plan to acquire Caesars.

“Further, we believe it is na?ve to take the transaction at face value at present, as we expect continued culling of the portfolio, driven primarily by choice, rather than pressured dispositions,” said the Deutsche Bank analyst. “As such, we expect pro forma leverage, a concern of investors in the current market, to trend lower prior to close.”

See The Forest Through The Trees

Shares of Eldorado plunged 17 percent combined on the day its offer for Caesars was made official and the following trading day, but the stock has since recovered a good portion of those losses. Over the past week, it’s up 10.45 percent, indicating some investors are warming to an acquisition that will take Eldorado from sleepy regional operator to a US casino behemoth.

“We think those viewing the ERI stock reaction as a reflection of investor perceptions of the fundamental aspects of the deal are being somewhat shortsighted, as we believe the weakness in shares is more a function of technicals than anything else,” adds Santarelli.

What Are “Technicals?”

In financial market terms, “technicals” refer to technical analysis, a school of trading where participants rely on charts, price movement, volume interpretation and other indicators to make decisions. Technical analysis is applicable to an array of asset classes, including bonds, commodities and equities.

Specific to Eldorado technicals, Santarelli may be referencing the stock’s rise to the $55 prior to the release of the Caesars news, a price range the name had difficulty breaking through. Price areas that a security repetitively touches but does not surpass are known as “resistance” points. Traders often sell stocks after resistance is touched several times but not exceeded.