In the wake of the spread of the novel coronavirus, a number of unusual occurrences have taken place in the financial markets. For instance, stakeholders in Eldorado Resorts (NASDAQ:ERI) watched in horror as their shares were absolutely crushed. Yet, a well-known financial institution recently gave Eldorado Resorts stock an eye-opening price-target raise.
ERI is a casino stock, and even with the market in recovery mode, the gambling industry remains in flux. It’s understandable if traders are hesitant to take a long position now. People might not be entirely ready to go out and spend their money at casinos yet.
Plus, even as Nevada phases in the state’s gambling-market reopening, the experience will be markedly different. Social-distancing guidelines will be enforced, and sanitizing and hygiene will be prioritized.
Thus, the gambling world is entering into a weird but necessary “new normal.” Still, as we will see, there’s a prominent financial firm that really likes ERI stock’s prospects going forward. Is the optimism overstated, or a reflection of a reopening that’s back on track?
A Closer Look at Eldorado Resorts Stock
The beatdown of Eldorado Resorts stock, which took place in February and March, could only be described as traumatic. It took nerves of steel to stay in the long side of the trade as true capitulation took hold.
In hindsight, though, it could be argued that the run-up in share price from $39 in September of 2019 to nearly $70 in February of this year was overdone. Perhaps a pullback was due at that point in time. But what followed was more than just the market correcting an overheated asset.
A drop from around $70 to the $7 level took only a month but will probably be remembered for a lifetime. Some of that staggering price loss has been recovered, thankfully. Still, Eldorado Resorts stockholders undoubtedly would like to see more evidence that the buyers have regained control from the sellers.
A Price-Target Shocker
When analysts at Deutsche Bank assign a price target to a stock, many investors pay attention. That’s because Deutsche Bank is not only a large financial institution but also a highly respected analytic firm that’s made some accurate calls in the past.
This month, investors definitely took notice when Deutsche Bank doubled its price target on Eldorado Resorts stock from $28 to $57. That’s an occurrence that you don’t see every day among major analytic firms. It’s a rare seal of approval that merits our attention.
The share price jumped 8% as the announcement of the price-target raise, illustrating how influential analysts’ projections can be. Along with the noteworthy price-target increase, Deutsche Bank expressed its expectation of “new margin peaks ahead” for Eldorado Resorts stock.
Affirming a Positive Outlook
At around the same time, a more muted optimistic tone was struck by Moody’s, another famous analytic firm. Specifically, Moody’s issued a “Corporate Family Rating” of “B1,” citing Eldorado’s “significant size and geographic diversification, and good regional gaming execution.”
Fair enough, but the primary driver of growth for Eldorado will likely be Nevada’s reopening. Early in June, the company reopened five of its casinos in Nevada. Then, just a week later, Eldorado announced the reopening of five more Nevada-based casinos.
For Eldorado, that would mean that 21 out of 23 casino properties, or 91% of them, will be open for business again. But again, the company wants to emphasize that it will be “implementing procedures that limit gaming capacity and casino floor occupancy and ensure proper social distancing.”
Nonetheless, with more than 90% of the company’s casinos back in business, an ambitious price target makes perfect sense.
The Bottom Line
Is Deutsche Bank’s price-target doubling based on false hope, or a realistic outlook? It’s perfectly reasonable to expect $57, especially since Eldorado Resorts stock has been above that level. Sure, twofold price-target markups are unusual, but in this case Deutsche Bank’s bold projection is backed by logic, not hype.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.
