Eldorado, Monarch Casino Among Regional Names Worth Buying, Says Jefferies Analyst

Posted on: July 5, 2020, 08:00h. 

Last updated on: July 6, 2020, 12:53h.

Eldorado Resorts (NASDAQ:ERI) and Monarch Casino & Resort (NASDAQ:MCRI) are among the regional gaming equities liked by Jefferies analyst David Katz. That’s though he acknowledges a resurgence in coronavirus cases could hamper the near-term outlook for these stocks and others.

Jefferies Analyst Likes Churchill Downs
Churchill Downs is one of three gaming stocks preferred by Jefferies analyst David Katz. (Image: Newsweek)

Eldorado climbed 6.74% last week after finalizing an asset sale pivotal to sealing its $17.3 billion purchase of Caesars Entertainment (NASDAQ:CZR). It also responded on news that regulators in Indiana, Nevada, and New Jersey will take up that issue this month, potentially setting the stage for the transaction to be completed by the end of July or early August.

That move is all the more impressive when considering, as Katz notes, data indicates visits to Louisiana casinos tumbled last week as coronavirus cases there increased. ERI is in the process of divesting one of its Pelican State venues. But when it finalizes the Caesars takeover, it will operate three gaming properties there, making the state an important part of the combined company’s regional portfolio.

We view the data and recent headlines as modestly negative for regional operators in general,” said the Jefferies analyst. “Should the surge continue, there could be further impact to the trajectory of recovery.”

Louisiana is halting reopening plans for a month, and in Nevada, casino guests are required to wear masks while on the gaming floor. That policy isn’t yet denting traffic, as visits to Silver State casinos were modestly higher last week.

Limited Visibility, But Good News, Too

Katz adds that the COVID-19 pandemic and the lower capacity at which operators reopened regional properties make forecasting earnings for the coming quarters tricky. But on the upside, most companies in this segment have enough cash to survive through the end of 2020 if another full-scale shutdown comes to pass.

ERI doesn’t lack for support among sell-side analysts, with some saying the company will realize more cost savings out of the Caesars deal than previously expected. That is paving the way for increased generation of free cash flow and potentially sending the stock to $100 or higher down the road.

Katz is more reserved in his assessment, rating ERI a “buy” with a $38 forecast, which is below last Thursday’s close of $41.20.

“We continue to favor the inherent control of the regional gaming business model, the forthcoming benefits for Eldorado Resorts (ERI) in its pending merger with Caesars, as well as the financial stability of Churchill Downs (NASDAQ:CHDN) and Monarch Casino.

Sturdy Names

Earlier this year, Churchill Downs said its second quarter results will be materially affected by the COVID-19 shutdown, which forced closures of the company’s casinos and racetracks. However, those venues are reopening, the Kentucky Derby is slated for September, and the operator has nearly $701 million in cash – enough to survive more than a year in a no-revenue scenario.

Katz has a “buy” rating on that name, too, with a $156 price target, or upside of 18 percent from Thursday’s close.

Monarch Casino operates just two gaming properties – one in Nevada and one in Colorado. Often overlooked relative to other gaming equities, Monarch is drawing new interest from hedge funds as the number of those vehicles owning the name jumped to 15 at the end of the first quarter, up from 12 at the end of 2019.

The Jefferies analyst also rates Monarch a “buy” with a $38 price forecast, implying appreciation potential of almost 12 percent from the July 2 close.