Red Rock Resorts Stock Story Supported by Analysts Post-Q3 Earnings

Posted on: November 8, 2023, 03:18h. 

Last updated on: November 8, 2023, 03:38h.

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

On a mostly downbeat day for gaming equities, shares of Red Rock Resorts (NASDAQ: RRR) edged higher after the company delivered decent third-quarter results late Thursday.

red rock stock
The Red Rock Casino Resort, pictured above. Analysts remain bullish on the name following third-quarter earnings. (Image: YouTube)

The Station Casinos parent announced it earned 60 cents a share on revenue of $411.6 million during the July through September period. Analysts expected earnings of 39 cents on sales of $412.2 million. Despite the revenue and news that the opening of the Durango Casino and Resort has been pushed back to December 5 from November 20, sell-side analysts remain mostly constructive on the stock.

While there are concerns in the investment community regarding potential adverse effects on regional gaming equities attributable to macroeconomic headwinds, some analysts argue that scenario is largely priced into shares of Red Rock, and that the operator could prove resilient thanks to ongoing strength in the Las Vegas locals segment.

While there could be near-term hesitancy to buy RRR shares for a number of macro-related reasons, longer term we continue to believe spending/visitation trends will remain relatively healthy across the LV Locals market while RRR’s stable cost structure should ultimately allow for greater flow through,” wrote Stifel analyst Steven Wieczynski in a note to clients.

He rates Red Rock a “hold” and reduced his price target on the name to $47 from $51. The revised price forecast still implies upside of more than 10% from current levels.

Red Rock Benefits Include Balance Sheet Strength

While many market participants think of Strip operators such as Caesars Entertainment and MGM Resorts International (NYSE: MGM) as the primary avenues for investing in Las Vegas, Red Rock offers a different approach that reduces the volatility associated with Strip assets.

As noted by Wieczynski, Red Rock’s balance sheet is “clean” relative to its peers, and the operator is outpacing rivals when it comes to converting earnings before interest, taxes, depreciation, and amortization (EBITDA) into free cash flow — a trait the could be meaningful over the long term.

Likewise, there are Las Vegas-specific macro tailwinds that could drive long-term appreciation by Red Rock stock, including rapid population growth. That’s vital to a gaming operator with all of its venues in the Las Vegas Valley.

“We view the economic tailwinds that drove outsized growth in the greater Las Vegas economy ahead of COVID-19 as structural in nature (favorable tax rate, growing retiree base, diversifying economy/labor force) and thus expect them to stay healthy which should put RRR’s EBITDA flow through in a much stronger position moving forward,” added the Stifel analyst. “Unemployment trends in Las Vegas continue to be favorable as well as population growth which are a positive for RRR.”

Durango Could Be 2024 Catalyst for Red Rock

As noted above, Red Rock pushed back the opening of Durango by a couple of weeks, but that doesn’t damage the ability of the new venue to be a catalyst for Red Rock shares next year. In a note to clients, CBRE analyst John DeCree reiterated a “buy” rating on the stock while observing Durango could be a near-term growth driver.

He added that as the new casino resort ramps up, it could bolster Red Rock’s free cash flow and speed up the operator’s deleveraging efforts.

Citing Red Rock’s ownership of all the real estate on which its casinos reside, as well as hundreds of acres of unused land throughout Las Vegas, DeCree said the stock offers favorable volatility characteristics relative to peers.