Red Rock Resorts Among Top Local Casino Stock Picks Following Strong Q2 Earnings

Posted on: July 29, 2021, 01:21h. 

Last updated on: July 29, 2021, 03:19h.

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

Red Rock Resorts, Inc. (NASDAQ:RRR) traded lower Thursday following an impressive second-quarter earnings report released late Wednesday. But analyst remain broadly enthusiastic on the parent company of Station Casinos.

red rock resorts
The Red Rock Resort outside of Las Vegas. Analysts are bullish on the company following strong Q2 results. (Image: Vegas Eater)

Red Rock joins the list of operators with heavy Las Vegas locals (LVL) exposure reporting stout results for the June quarter. Red Rock said earnings before interest, taxes, depreciation and amortization surged 82 percent in the second quarter, compared with the same period in 2019. Due to the severe adverse impact of the coronavirus crisis on casino operators’ 2020 results, 2021 numbers are being compared to pre-pandemic data.

As is the case with other comparable operators, such as Boyd Gaming (NYSE:BYD) and Golden Entertainment (NASDAQ:GDEN), Red Rock realized significant margin expansion as a result of the pandemic. Analysts and investors are now pondering if that expansion is sustainable. It appears it is for the Boulder Station operator.

We believe most of the margin expansion is sustainable. But investors will look for new avenues of growth into next year,” said Macquairie analyst Chad Beynon in a note to clients today.

He reiterates an “outperform” rating on Red Rock stock, with a $55 price target, up from a prior forecast of $51. That implies upside of about 37 percent from the Thursday close.

Levers for Red Rock Upside

A key constituency for Red Rock is the aforementioned LVLs. That segment includes a variety of customers, spanning staffers from Strip casinos to well-heeled retirees that moved to Nevada to enjoy a lower cost of living.

While that demographic is proving sturdy and Red Rock is clearly adept at margin expansion, investors are likely eyeing the next acts. That includes the Durango project, which is slated to break ground in the first quarter of 2022, and what the company will do with the influx of cash from selling the Palms earlier this year.

Noting that the operator’s leverage is just 1.8x and that it repurchased $26 million worth of its own shares during the quarter, Beynon points out Red Rock has a “transformed balance sheet, which will allow for capital returns or inorganic growth should there be an M&A (mergers and acquisitions) opportunity.”

The analyst says the gaming company has multiple undeveloped assets beyond Durango that could each be worth $2 to $3 a share.

Odds and Ends

Red Rock’s Fiesta Henderson, Fiesta Rancho, and Texas Station remain closed, and one analyst says it’s possible those gaming venues never return to action.

“At this point, we aren’t sure when/if the remaining three assets that remain closed will come back online. But our guess is that some, if not all of them, might never be reopened,” said Stifel analyst Steven Wieczynski.

He has a “hold” rating on Red Rock. But he boosted his price target on the name to $48 from $41.