Red Rock Resorts Rallies After Forecasting Consensus-Beating Q4 Results, Palms Chips In

Posted on: January 23, 2020, 10:20h. 

Last updated on: January 23, 2020, 12:31h.

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

Shares of Station Casinos parent Red Rock Resorts, Inc. (NASDAQ:RRR) rallied Thursday after the company pre-announced fourth-quarter results, delivering revenue and earnings before interest, taxes, depreciation and amortization (EBITDA) estimates that thump Wall Street forecasts.

The Palms helped Red Rock deliver a bullish early reveal on fourth-quarter results. (Image: Fox5 Las Vegas)

The operator of the Palms said it expects revenue for the December quarter will come in between $447 million and $474 million, while EBITDA should be $134 million to $142 million. The consensus estimates called for EBITDA of $128 million on turnover of $464 million. Red Rock is scheduled to officially report those results on Feb. 21.

The upside to our forecast was predominantly margin-driven, an outcome we largely attribute to the implementation of greater than anticipated cost mitigation efforts at the Palms and a nearly 200bps y/y improvement in same-store EBITDA margins within the Las Vegas Locals (LVL) segment,” said Stifel analyst Steven Wieczynski in a note provided to Casino.org.

Those numbers indicate Red Rock’s Palms investment could finally be starting to pay off. Between the $312.5 million paid to the Maloof family to acquire the venue and the $690 million spent to refurbish it, Red Rock has devoted over $1 billion to the property that’s a mile west of the Las Vegas Strip.

Initially, analysts questioned Red Rock’s Palm spend because the company’s core competency had long been casinos catering to locals, not higher-end integrated resorts.

Speaking of Local Exposure…

Las Vegas-based Red Rock operates 21 gaming properties, including “ten major gaming and entertainment facilities and ten smaller casinos” in and around Sin City, according to the company.

In addition to the Palms and its namesake Red Rock, the gaming firm operates Boulder Station, Palace Station, Santa Fe Station, and Texas Station, among other local-focused venues. The emphasis LVLs is a benefit at a time when the Southern Nevada economy is strong, says Wieczynski.

“LVL same-store revenues (ex-Palms) increased 4% y/y, using the midpoint of the pre-announced revenue range,” said the Stifel analyst. “We suspect this level of growth exceeded investor expectations and was supported by a modest revenue ramp at Palace Station.”

Red Rock also said today it’s selling $500 million worth of corporate debt, with the bulk of those proceeds expected to be used to retire existing debt, a move that will help the company reduce interest expenses.

More Confirmation Needed

While Wieczynski said it’s encouraging to see Red Rock deliver a bullish pre-announcement, he maintains a “hold” rating and $26 price target on the stock, He is noting that more confirmation of Palms’s ability to increase margins in an area dominated by LVL properties is needed.

“Accordingly, though we believe RRR continues to boast an approachable valuation (sub-10x 20E EBITDA), we would prefer to remain patient with the shares until there is clearer evidence suggesting the Palms overhang is dissipating,” said the analyst.

At this writing, shares of Red Rock are up 3.41 percent on volume that has already exceeded the daily average.