Red Rock Could Get Back to Basics, Potentially Benefiting Investors, Says Analyst

Shares of Red Rock Resorts (NASDAQ:RRR) are slumping today after the gaming operator revealed a murky outlook for four of its still closed Southern Nevada properties. But one analyst sees opportunity with the stock should management opt to return the company to its core competencies.

Following a better-than-expected second-quarter earnings report delivered yesterday after the close of US markets, Red Rock executives were unable to give a definitive timeline as to when or if the Fiesta Henderson, Fiesta Rancho, Palms, and Texas Station will reopen, something that could be weighing on the stock today.

In reiterating a “hold” rating on Red Rock stock, Stifel analyst Steven Wieczynski said that management could eschew the glitz and frivolities of many non-gaming amenities that are so vital to Las Vegas Strip operators, and focus more on pure gaming.

Seems like management is starting to think about changing their operating strategy moving forward and going back to more of the old Station Casino model, which focused more on customers and pure gaming versus all the fancy non-gaming amenities,” Wieczynski said.

None of the aforementioned venues are on the Strip. But Station Casinos have exposure to Strip trends, which Wiecynski says could portend a “protracted cash flow recovery” relative to rival regional gaming companies.

Strip Exposure

Confounding operators with Strip exposure is that many travelers are reluctant to hop on planes to get to Las Vegas without a coronavirus vaccine. Even under the rosiest of assumptions, that scenario is unlikely to change until at least early to mid-2021.

As Wieczynski notes, although Red Rock doesn’t operate Strip venues, the company is levered to the strength of that area.

“From a direct perspective, we are keenly focused on the company’s hybrid properties, led by the Palms. We view the success of these properties as directly tied to the economic vibrancy along the Strip, which, in our view, raises the probability of a protracted recovery,” he said. 

He adds that one of the company’s core demographics is Strip staffers that frequent Station venues after their shifts. Until the fiscal health of that group improves, it will be difficult for Red Rock to make a full recovery.

Problemed Palms

Red Rock management said Tuesday the fate of the Palms and the other still-closed casinos will largely be determined by demand trends at the company’s properties that are currently open. There was no mention of the Palms being sold, a rumor that popped earlier this year, but was subsequently put to rest by management.

Wieczynski says it’s anyone’s guess how the investment community will react if the Palms isn’t reopened, or if it’s sold.

“We wonder how investors will react if The Palms isn’t reopened or even eventually sold? Would they applaud management for cutting ties, or put them in the penalty box because it was a bad use of capital?” 

He has a $14 price target on Red Rock stock, implying 16.6 percent upside from current levels.