Eldorado Resorts (NYSE:ERI) may well be a very good short-term pick. It definitely has strong positive momentum, as Eldorado Resorts stock it more than doubled between May 13 and June 17.
But, because of my personal experience, reports from Las Vegas and Penn National (NASDAQ:PENN) , and the high debt levels of Eldorado, I can’t bring myself to be bullish on the shares’ longer-term outlook.
My Personal Experience
In the last few years, playing blackjack at casinos has become one of my hobbies. However, I only indulge in the hobby once every few months.
I’ve been to casinos in New Jersey, Pennsylvania, Florida, Mississippi, Oklahoma and Las Vegas. Outside of Las Vegas, I’ve noticed that the average age of gamblers at casinos is about 60; in Las Vegas, their average age is about 40.
My inference is confirmed by the fact that Penn, as I noted in a previous column, has “indicated that most of the people who visit its physical casinos are not young.” A review of Penn’s website shows that most of its casinos are located outside of Las Vegas.
Of the 23 casinos listed on Eldorado’s website, five are in Nevada, but none is in Las Vegas. Even assuming that the company’s Nevada casinos draw crowds as young as those in Las Vegas, the vast majority of its overall customer base likely consists of people over the age of 50.
As I noted in the column on Penn, older people are much more vulnerable to the novel coronavirus and thus are much more likely to avoid potentially crowded, indoor areas like casinos. That’s particularly true during the warm weather, when there are so many other fun activities in which to partake.
Taken together, this information strongly indicates that Eldorado’s financial results will be very weak over the next few months.
Las Vegas and Penn Don’t Seem to Be Doing Very Well
On June 4, a few days after Las Vegas’ casinos had reopened, foot traffic on the city’s Strip was reportedly light. That certainly doesn’t bode well for Eldorado Resorts stock. One woman who visited a casino on the Strip was shocked by “how quiet things were” there.
Also not boding well for Eldorado is the fact that, on June 15, Penn, which reported that some of its casinos were open, announced that it may nonetheless permanently lay off 233 of its employees.
Even more discouraging for Eldorado (and, of course, for Penn) is the fact that Penn apparently did not commit to bringing back any of the 26,000 employees it had furloughed in April. Finally, Penn’s disclosure that the “continued social distancing requirements and uncertain business volumes means our properties will not be able to resume normal operations for the foreseeable future” is very bearish.
Penn’s statements indicate that companies which own casinos outside of Las Vegas could indeed be in deep trouble.
Eldorado’s High Debt Levels
The company’s net debt, or the amount by which its debt exceeds its assets, is $2.4 billion, versus the company’s market cap of $3.36 billion. Further, Eldorado’s profitability tends to drop sharply when its revenue declines. For example, a Seeking Alpha columnist recently pointed out that, in the first quarter, when Eldorado’s revenue sank 25.6% versus the same period a year earlier, its EBITDA tumbled 33% year-over-year.
The Bottom Line on Eldorado Resorts Stock
Eldorado’s customer base likely tends to have a high average age, and its main business consists of indoor casinos. During the coronavirus crisis, that’s a bad mix.
Further, the reports from Las Vegas and Penn National indicate that casinos are struggling. And Eldorado is heavily indebted. The combination of a threatened business and high debt levels creates elevated risk.
Finally, analysts, on average, expect the company to lose a whopping $9.36 per share this year and another $1.09 per share in 2021. Given these points, I recommend that longer term investors stay away from the stock.
As of this writing, Larry Ramer did not own shares of any of the aforementioned securities. Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been airline stocks, oil stocks and Snap. You can reach him on StockTwits at @larryramer.