Red Rock Stock Rocked Following Q1 Earnings Miss

Posted on: May 4, 2022, 09:08h. 

Last updated on: May 4, 2022, 11:35h.

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

Red Rock Resorts (NASDAQ:RRR) stock is tumbling Wednesday, a day after the casino operator reported first-quarter sales that missed Wall Street estimates.

Red Rock
Red Rock Resort in Summerlin, Nev., seen above. The operator’s shares are falling today following a first-quarter revenue miss. (Image: Fodor’s Travel Guide)

After the close of US markets Tuesday, the Green Valley Ranch operator said it earned 77 cents a share on sales of $401.6 million in the first three months of the year. Analysts expected revenue of 70 cents on revenue of $408.32 million.

While net Las Vegas revenue and earnings before interest, taxes, depreciation and amortization (EBITDA) jumped 17% and 21%, respectively, during the March quarter, investors don’t appear impressed. That’s highlighted by an almost 14% loss for Red Rock stock in midday trading.

Macro headwinds, including high inflation, rising interest rates, and increasing recession chatter are among the factors ailing gaming equities in 2022, and Red Rock isn’t immune from those trends.

From here, investors will have to decide for themselves if owning highly discretionary companies makes sense right now with a potential recession being discussed on the horizon,” said Stifel analyst Steven Wieczynski in a note to clients.

He rates Red Rock “hold” with a $50 price target, down from $55.

Red Rock Stock Investors Concerned About Margins

Regional gaming companies, including Red Rock, learned to be leaner during the coronavirus pandemic, ratcheting up operating margins in the process.

However, investors are pondering when margin expansion will fade. Red Rock believes it can continue incrementally boosting margins. That’s particularly true as convention business returns and more consumers visit the movie theaters at its Las Vegas-area gaming venues.

“The group business runs at historical margins of ~50%, and the theater business is almost all flow-through, which gives us confidence in further margin expansion as both ancillary revenue streams are poised to return later in the year and into 2023,” adds Wieczsynski.

In addition to its eponymous casino-resort and Green Valley Ranch, Red Rock operates seven casinos under the Stations brand, seven Wildfire venues, and several other locals-focused venues, all of which are strewn across Las Vegas Valley.

Texas Station, Fiesta Rancho, and Fiesta Henderson remained closed in the first quarter.

Silver Lining for Red Rock: Las Vegas Is Booming

While Red Rock stock is plunging today, the longer-term thesis for the name remains solid because of the resilience of Las Vegas and the increasingly diversified locals market there.

Las Vegas locals are Red Rock’s marquee constituency. But these days, that demographic consists of much more than construction workers and staffers from other casinos.

While the Las Vegas economy has undoubtedly diversified since the Great Recession, and a growing retiree base has made Locals operators less dependent on service/construction employees, we continue to believe the fiscal health of the latter segment needs to be restored in order for RRR to thrive from here on out,” notes Wieczynski.

The analyst points out that population and unemployment trends in the Las Vegas Valley are favorable.  That’s indicating the near-term sticking point for Red Rock stock is the return of convention business.