On September 20, 2016, we called REI a buy at $14.25.
The Isle of Capri acquisition has already produced $30 million in synergies with another $5 million to come.
Results continue to prove my theory that family-founded gaming companies with heirs still at the helm bear intrinsic value not on a balance sheet.
Note: This article was exclusive to House Edge Members until the market’s open on Monday, August 21st.
We have been fans of Eldorado Resorts, Inc. (NASDAQ:ERI) from back in the day when we often traveled to Reno on company business and got to know many of the key industry players there. We were most impressed by Eldorado for lots of reasons but none more revealing than, back then, seeing younger members of the controlling Carano family up on the carousel pits selling change on the casino floor. We were in Reno to check out new technologies on slot machines at Bally’s and IGT (NYSE:IGT) that we were considering buying for a new high-end slot zone. While in town, friends in the equipment business introduced us to the Caranos. We walked their property, checked out their floor configurations, dined there and saw evidence of a very tight, well-run ship in every nook and cranny of the property. Since that time and ever since, we’ve seen in that company and other family controlled casino operations, now public, a definite relationship between a generational pass-through of on-the-ground knowledge about operations and gaming customers and EBITDA performance.
In this and subsequent articles, we’ll examine some of the family controlled and family founded US regionals. We’ll discuss those that we believe still have considerable runway to even better valuations and, in some cases, catalysts for transactions as the sector consolidates in the intermediate term.
First up: Eldorado Resorts, Inc.
Price at writing: $22.10. The stock is up over 35% since our first recommendation in September of 2016.
Earnings: Q2 est.: $0.2
Q2 Actual: $0.39
52-wk range: $10.65-23.45. Although the stock is near its yearlong high, we are not only sticking to our call last year for it to reach $30 but we are also now raising guidance on ERI to $35 by Q1 of 2018.
Our rationale: The company has ingrained one of the best player-focused service cultures in its line employees in the industry. It’s a product of three generations of Caranos who have learned the business literally from the casino floor up. In addition, we now believe ERI, with the Isle acquisition, has reached the scale for even more growth by merger or acquisition that will reward shareholders.
Among other key data points to come out of its Q2 earnings release: Tom Reeg, CFO, pointed out that the company had targeted $35 million in synergy savings to come out of the Isle buy. As of now, $30 million has already been achieved with another $5 million to go – at a pace ahead of schedule.
Market cap at writing: $1.693b
EPS: (TTM): 0.47
One-yr target estimate: $24.50. Our revised target $35.
Q2 net revenues: $426.8 million, down 2.5% YoY, largely related to extreme weather issues in its Mississippi properties and very tough comps in its tri-property Reno segment, which in 2016 got a huge boost from the 47,000 attendee room nights sold for the national bowling event. However, adjusted EBITDA was up 7.8% YoY to $100 million. Property level adjusted EBITDA was up 4.4% to $107.6 million with adjusted EBITDA margin of 25.2%, up 160 bps YoY.
ERI showed an operating loss for Q2 of -$86 million, almost all of which was related to non-recurring transaction related expenses of the acquisition. Reeg estimates that total EBITDA margins should track around 25% over the first two years of the Isle transaction.
Margins were up in its Midwest and West combined property matrix. The south, as previously alluded to here, was adversely impacted by severe flooding in Vicksburg, LuLu and Caruthersville that hit visitation.
In addition, ERI paid down $40 million in debt out of FCF and will continue at that pace, according to Reeg, and will hold at that level even if additional M&A opportunities arise. Anthony Carano, COO, indicated that further acquisitions in the regional space were in management’s crosshairs. All the positives accumulated through the customer-centric culture have already been demonstrated. The company has the resources, human and financial, and the appetite for growth in the years ahead.
In brief, management has integrated Isle solidly and has most of the transaction costs behind it. It expects to spend $50 million in capex, updating and renovating Isle and Eldorado properties going forward, focusing particularly on its Black Hawk (Colo) and Pompano (FL racing) properties that were part of the Isle acquisition.
Consensus Q3: Analysts have estimated earnings at $0.18. Per our review of the markets where ERI properties now operate – its transaction costs largely behind it, the further impact of improved customer-facing culture at all properties and capex improvements coming on line – we believe Q3 could produce a significant earnings beat.
- Explosion of economic growth in metro Reno. Consider the arrival of the Tesla (NASDAQ:TSLA) plant (6,000 jobs) – the 100 tech, manufacturing and service economy companies that have relocated to Reno over the past several years. Add to that the large numbers of Northern Californians, fleeing ever-increasing tax burdens of that state, who seek the weather and lifestyle of the Reno area. Among these are a growing diaspora of Silicon Valley refugees who are finding a hospitable business and cultural environment for their skills in Reno’s on-fire tech sector. It is also attracting larger numbers of early retirees due to the still-large stock of affordable upscale housing and outdoor recreational options. With three strong properties in the metro Reno area (Eldorado, Circus Circus, Silvery Legacy), the company is well positioned to market to this growing population base as well as the attendant convention and tourist business the new tech base is attracting.
- Its Black Hawk, Colo., property acquired in the Isle transaction likewise sits in a high-growth piece of geography, drawing from both the Colorado Springs and Denver markets that total over 3 million. Accordingly, ERI’s capex is earmarked for that property to meet the expected growth.
- We note the imminent exit from bankruptcy of Caesars Entertainment (NASDAQ:CZR) estimated to happen sometime in Q3. At this point, there is no certainty that the new owners of its proposed REIT split properties, who were its senior lenders, will have any appetite to be in the casino business, even as landlords. While they may indeed opt to hold on to all CZR properties split into the REIT, we believe there is also a good chance they will opt to put many of them on sale to raise cash and that they will use the money to either increase their own dividend flow or will just cash out. Should that happen, ERI will be a bidder if any viable CZR properties come up for sale.
Conclusion: With a solid track record over decades and committed customer-centric, cost-conscious, family-management talent in place, ERI could be a regional giant in the making with the financial and human resources to match its ambitions.