Eldorado Resorts Stock in Unusual Spot, History Says That Could Be a Good Thing

Posted on: July 19, 2019, 12:05h. 

Last updated on: July 19, 2019, 12:31h.

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

Eldorado Resorts, Inc. (NASDAQ:ERI), the regional gaming company that said last month it will acquire Caesars Entertainment Corp. (NASDAQ:CZR) for $17.3 billion, finds its stock in an unusual spot and if history repeats, the shares could be poised to rally.

Eldorado Resorts stock could see a pop if a historical pattern repeats. (Image:PlayUSA)

Over the past month, a period that includes the June 24 announcement of the Caesars deal, Eldorado stock is lower by 18.7 percent, but the bulk of that decline was confined to June 24 and 25. The shares have been mostly flat since then, but a rarely seen signal could indicate Eldorado stock is ready to recover.

The security just came within one standard deviation of its 320-day moving average — a move that has happened two other times in the past few years,” said Schaeffer’s Investment Research. “The security was higher one month later after both signals, averaging an impressive 10.4% gain.”

As of this writing, Eldorado was trading just under $45, meaning that if history repeats and the stock proceeds to notch a 10.4 percent gain from current levels, shares of the casino operator could be residing near $50 by late August.

Favorable Factors

Immediately following official news that Eldorado will acquire Caesars, creating one of the largest US gaming companies in the process, some analysts expressed concern that the Reno-based company is overpaying for the operator of Caesars Palace and properties under the Harrah’s and Bally’s names, among others.

The cash and equity portion of the $17.3 billion price tag equals $8.5 billion, or more than double Eldorado’s market value on the trading day before the offer was publicized. Fears that Eldorado may be paying too steep a price for Caesars were short-lived as analysts covering the regional operator broadly applauded the deal with some forecasting significant upside for the stock.

“Analysts are bullish on Eldorado Resorts, with all five in coverage calling it a ‘strong buy,’” said Schaeffer’s. “Plus, the consensus 12-month target price of $60.22 is at a roughly 30% premium to current levels, and represents uncharted territory for the equity.”

Eldorado is actively looking to sell some non-essential properties to raise cash. Since June 17, the company has announced the sale of eight casinos for a combined $3.81 billion. Those capital-raising moves have been lauded by analysts with some forecasting that further asset sales could help Eldorado raise its credit rating, which is currently in junk territory.

Upcoming Catalysts

Eldorado reports second-quarter earnings on August 6 prior and analysts are expecting the company to post a profit of 54 cents per share, up from 47 cents a year earlier.

Beyond earnings commentary, analysts are likely to press Eldorado CEO Tom Reeg on the status of additional casino sales. Even with the aforementioned divestment of eight properties, the combined Eldorado/Caesars owns approximately 65 gaming venues across the US.

What’s Standard Deviation?

In Wall Street speak, standard deviation is used to gauge a security’s long-term volatility trends. In plain English, standard deviation measures how far a stock moves away from its mean price.

In a hypothetical example, let’s say Eldorado’s mean stock price for a year was $50, but it traded in a range of $30 to $70 over those 12 months. That would constitute a high standard deviation stock.

A move of one standard deviation, such as the one mentioned by Schaeffer’s to illustrate Eldorado’s flirtation with a particular moving average, is not considered highly volatile.