Red Rock Rallies Despite Sagging Earnings, Fertitta Quashes Palms Sale Rumor

Shares of Red Rock Resorts (NASDAQ:RRR) are soaring Wednesday, even after the operator posted first-quarter results that badly missed estimates. That indicates investors are focusing on comments from management confirming that the Palms isn’t for sale.

The company said it lost $2.18 a share on revenue of $377.39 in the January through March period. Analysts expected a loss of just a penny a share on turnover of $393.43 million. The year-over-year numbers may not be comparable because Red Rock took a $27 million charge in the quarter related to paying staff in April while gaming properties were shuttered because of the coronavirus.

Glum first-quarter results are a prominent theme in the gaming industry this year. But investors are embracing comments from Red Rock CEO Frank Fertitta that the company isn’t interested in selling the Palms on the Las Vegas Strip.

First, we can dispel the rumors that the Palms is for sale,” he said on a conference call. “That is a rumor. It’s not correct. The way we’re evaluating the foreclosed properties, is we felt that we took a very hard look at how much of our customer database we can cover in Phase 1, and be most efficient as possible to generate as much revenue as possible. Right?

Recently, speculation swirled about the post-virus fate of the venue, with talk that Red Rock could leave the Palms closed while trying to find a buyer.

‘Mixed Emotions’

Following a shutdown that spanned two months, gaming properties in some states are reopening, while some marquee Strip venues are planning to soon follow suit. But analysts reiterate the view that regional markets and casinos targeting locals will rebound faster than destination cities such as Las Vegas.

“We expect the company’s market-leading Las Vegas Locals assets to prove relatively resilient as COVID-19 headwinds subside,” said the analyst. “On the other hand, we believe the company’s direct and indirect exposure to the Las Vegas Strip could lead to a protracted operating cash flow recovery, as compared to its regional operator peers.”

Red Rock is the parent company of Station Casinos. Those properties include Boulder Station, Green Valley Ranch Resort, Palace Station, Red Rock Resort, Santa Fe, Sunset Station – most of which target Las Vegas locals.

Fertitta said the plan is to reopen the Palms, but that will be dependent on demand the operator sees at its other venues.

Levered to the Strip

Wieczynski notes Red Rock’s exposure to the Strip is twofold. First, there’s the obvious need for business and tourism travel to recover to stoke demand to compel the operator to reopen the Palms.

Second, a core constituency for Red Rock’s local venues are employees of other Strip casinos. With rival operators slated to slowly reopen venues and many jobs expected to be lost for good, Red Rock could encounter near-term headwinds.

“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,” said the Stifel analyst.