Red Rock Making Margin Moves, Analyst Sees Strength in Vegas Locals Segment

Posted on: October 28, 2020, 11:09h. 

Last updated on: October 28, 2020, 12:12h.

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

Red Rock Resorts (NASDAQ:RRR) posted better-than-expected third-quarter results. The company said it earned 56 cents a share on revenue of $353.2 million with the help of improving margins and resilience in its key Las Vegas locals (LVL) demographic.

Red Rock Resorts
Boulder Station Casino in Las Vegas seen here. An analyst is bullish on operator Red Rock Resorts. (Image: Las Vegas Review-Journal)

Wall Street was expecting the Station Casino operator to post per-share earnings of 15 cents on sales of $276.2 million. The thumping of forecasts prompted some excitement among analysts. Stifel’s Steven Wieczynski acknowledged a prior call on the impact of the Las Vegas Strip lethargy on Red Rock’s business was wrong. He lifts his price target on the gaming company to $22 from $18.

Like other regional operators, Red Rock is pulling margin levers, trimming less-profitable frivolities, such as buffets, and getting back to gaming basics to contend with a rough operating environment forced by the coronavirus pandemic.

While tough to predict what type of margin improvement will be realized long-term, we think it’s fair to assume margins will be much stronger moving forward, as the majority of expense cuts seem permanent,” said Wieczynski.

The analyst adds the LVL market should remain “resilient,” backed by strong spending and visitation trends. Las Vegas-based Red Rock operates nearly 20 gaming venues in Southern Nevada.

Looking at Station Casinos Model 

Red Rock delivered impressive September quarter results despite four of its venues – Texas Station, Fiesta Rancho, Fiesta Henderson, and Palms Casino Resort – remaining closed. Those closures are slated to remain in effect until next June.

On a conference call with analysts, CEO Frank Fertitta said the operator is seeing “good crossover play” from the closed properties to its open casinos. The timeline for reopening the aforementioned properties will continue to be reevaluated. Director Lorenzo Fertitta says the company likes what it’s seeing in terms of margins and profitability operating a smaller number of casinos in the Sin City area.

While there’s been plenty of chatter on the fate of the shuttered venues, particularly the Palms, Wall Street is bullish on Red Rock’s current model.

“Clearly, moving back to the old Station Casinos model is working right now, as management is focused more on their top customers and pure gaming versus all the fancy non-gaming amenities,” said Wieczynski. “Margin expansion was beyond impressive during the quarter.”

Calling for Patience

The Stifel analyst finds a lot to like with Red Rock stock but remains cautious about the recovery time frame for Las Vegas. He notes the operator is, directly and indirectly, tethered to Strip trends, though some of those vulnerabilities are reduced with the Palms being temporarily closed.

Translation: Investors have the luxury of patience with Red Rock stock and can wait for Sin City trends to firm up before getting involved with this name.

“In the end, given our expectation for the Strip, and Las Vegas more broadly, to prove a laggard in the COVID-19 recovery process, we believe investors will have the opportunity to remain patient with RRR shares,” adds Wieczynski. Furthermore, we see less dislocation in the company’s trading multiple (~10x 22E EBITDA).”