Red Rock Has Margin Durability, Says Analyst

Posted on: September 5, 2024, 05:12h. 

Last updated on: September 6, 2024, 09:42h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Red Rock Resorts (NASDAQ: RRR) has structural tailwinds that bode well for the casino operator’s margin durability — something at least one analyst believes investors aren’t giving the gaming company enough credit for.

Durango
Durango Casino & Resort in Southwest Las Vegas. Operator Red Rock Resorts can continue boosting margins, says an analyst. (Image: Eater Las Vegas)

In a note to clients on Thursday, Deutsche Bank analyst Carlo Santarelli observed that Red Rock’s property-level margin expansion is more sustainable than market participants perceive it to be. The analyst said multiple factors support that thesis.

These three drivers, each of which we break down on their own, are: 1) the current portfolio versus the 2019 portfolio, 2) gaming promotions, which are less structural, but nicely beneficial at present, and 3) the food and beverage segment,” wrote the analyst.

Indeed, Red Rock’s portfolio looks much different today than it did before the coronavirus pandemic. As a result of the global health crisis, the gaming company closed the Fiesta Henderson, Fiesta Rancho, and Texas Station, and never reopened those venues. It also sold the Palms, taking a loss on the deal. Conversely, Red Rock opened Durango in Southwest Las Vegas last December, and that new casino is off to an impressive start.

Market Doesn’t Appreciate Red Rock Changes

Following the pandemic, casino operators, including Red Rock, enjoyed immediate boosts to margins because many culled less profitable nongaming offerings, such as lower-end dining and entertainment options.

Still, some analysts and plenty of investors questioned the sustainability of that margin expansion, speculating that casino operators could run lean for only so long as a return to normalcy in marquee gaming markets set in. Specific to Red Rock’s margins, Santarelli believes some market participants aren’t viewing the story in the proper context.

“While the most considerable pushback we get to our bullish view on RRR relates to valuation, we also believe there is considerable apprehension related to the margin outperformance, relative to 2019, when looking at RRR on a standalone basis, as well as looking at RRR relative to peers. In our view, the market is underappreciating the true structural changes that are driving the bulk of the margin improvement, changes that do not relate to operating performance, nor the broader competitive environment, to a great degree,” according to the analyst.

Santarelli added that Red Rock is likely to continue its margin expansion event if revenue growth encounters headwinds.

Red Rock Solid By Comparison

Year to date, shares of Red Rock are higher by 9.43%. That’s good for one of the best showings among all small-cap casino equities and it far outpaces broader small-cap benchmarks. Since the start of the year, the Russell 2000 and S&P Small Cap 600 indexes are up 6.7% and 5%, respectively.

Making Red Rock’s 2024 performance all the more noteworthy is the fact that it occurred against the backdrop of concerns that Durango is poaching business from the operator’s other venues — namely its eponymous casino hotel in Summerlin, Nev. Executives have acknowledged that scenario and it expect it to rectify itself over time.

Santarelli rates the stock a “buy” with a $65 price target, implying upside of 13.3% from Thursday’s closing price.