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Don’t Let Buyout News Trick You into Betting on Eldorado Resorts Stock

One of the sectors hardest hit by the novel coronavirus, casino gaming companies suffered sickening volatility when the pandemic struck. However, for stockholders of Eldorado Resorts (NASDAQ:ERI), they at least have something to smile about. After a year since management announced its takeover offer for Caesars Entertainment (NASDAQ:CZR), the hotels operator has been making significant headway, lifting Eldorado Resorts stock along the way.

Don’t Let Buyout News Trick You into Betting on Eldorado Resorts Stock
Source: Don Mammoser / Shutterstock.com

Last week, Eldorado aggressively raised capital to shore up its financial strength. According to Casino.org contributor Todd Shriber:

… Eldorado said it’s selling 18 million shares of common stock, with underwriters of that deal having a 30-day window in which they could purchase another 2.7 million shares. The option was exercised, meaning the regional operator sold 20.7 million shares, raising $772 million.

In a separate deal, Eldorado came to an agreement with VICI Properties (NYSE:VICI) “to monetize Caesars Forum Convention Center at Caesars Palace Las Vegas, and sell 23 acres of undeveloped land near the Strip. Combined, those transactions are worth $503.5 million.”

Finally, Eldorado announced a $6 billion bond sale. With these maneuverings, the company appears poised to receive federal approval to complete its Caesars takeover. But is this enough to warrant a risk in Eldorado Resorts stock?

On one hand, I can appreciate why contrarians are angling to place a bet. With the buyout, the two organizations will form the biggest domestic gaming entity. As well, the coronavirus brought Eldorado Resorts stock down to ridiculous, undeserved levels. Even now, ERI is trading at a significant discount to its start-of-year price.

However, this pandemic is hardly over. With Covid-19-related hospitalizations increasing in many states, this bodes poorly for the gaming industry, which is dependent on consumer confidence.

Travel Data Reveals Concerns for Eldorado Resorts Stock

When Las Vegas decided to reopen its doors, several ardent gamblers welcomed the news. In addition, people who have been forcibly cooped up in their homes were ready for a change of pace. Therefore, huge crowds formed as Sin City came back for business.

Naturally, we saw enthusiasm spike for Eldorado Resorts stock leading up to the event, considering the underlying company’s merger plan with Las Vegas icon Caesars. But as the gambling mecca settled into its new normal, ERI went rangebound. For instance, between June 4 and June 19, shares declined more than 2%. What gives?

Although I don’t want to speak too soon, Eldorado Resorts stock and the broader gaming complex may be having a “Tulsa” moment. Prior to President Trump’s return to the campaign trail in Oklahoma, both he and his campaign staff boasted about a million-strong fan base awaiting his arrival.

What actually transpired was an embarrassment and a potential nightmare. People did turn out but they only managed to fill roughly one-third of the Bank of Oklahoma Center, the site of the rally. Interestingly, several anti-Trump folks, including young voters and K-pop fans, signed up for the event with no intentions of attending.

What does this have to do with the Eldorado Resorts stock forecast? Primarily, a pivotal statistic doesn’t justify the bullishness in this sector.

Las Vegas automotive traffic stats vs 2019 levels
Click to Enlarge
Source: Chart by Josh Enomoto

According to TomTom.com, automotive congestion stats in Sin City are down 56% from the year-ago level for the week starting June 15. But that’s not my only concern. Since the crisis started, Las Vegas traffic has averaged a decline of 57% from the year-ago period. Thus, we’re only talking about a very modest, if that, single-percentage-point improvement.

This suggests that most of the casino visitors are Vegas residents. However, you’d rather go beyond this circular revenue stream and get out-of-state/foreign revenue sources.

Don’t Get Too Excited about Casinos

Of course, someone might say that TomTom’s numbers are “BS.” That could be the case. However, their data indicated an increase in Vegas traffic in January and February. According to the Las Vegas Conventions and Visitor Authority, this trend checks out: total visitor numbers increased in the first two months of this year.

Indeed, it’s possible that had the coronavirus not ruined everything, Sin City was on course for a record year in visitor volume. Therefore, absent compelling data to the contrary, I’m not willing to dismiss TomTom’s stats. And that means you should be careful about getting too deeply involved with Eldorado Resorts stock.

While it’s absolutely possible that I could be wrong about this, consider again that ERI has been flat recently. And just like President Trump’s Tulsa rally, it’s also possible that casino stocks have moved higher on excess enthusiasm. Meanwhile, in recent days, Las Vegas COVID-19 cases have spiked higher.

With so many variables in play, I believe the smarter option is to wait this one out for now.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.

Article printed from InvestorPlace Media, https://investorplace.com/2020/06/dont-let-buyout-news-trick-you-into-betting-on-eldorado-resorts-stock/.

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