Red Rock Resorts: Under The Radar Despite Solid Performance (NASDAQ:RRR)

Red Rock Resorts, Inc. (NASDAQ:RRR) earnings release: May 7^th. EPSE: $0.29

We expect a beat ~$0.7 due to ramp of new Durango if early numbers are delivered

The Las Vegas local market’s strength has been overlooked by many investors in the gaming sector, who see its demographic limits. And it’s understandable. The large cap industry leaders are exposed to total addressable markets, or TAMs, in the hundreds of millions. Gaming stocks deep into the locals market are at best competing for shares of a 3m demo. While there is a certain amount of tourist traffic that dips into locals casinos, it remains a ball game frozen in limited geography.

Yet despite this, we have a locals stock whose value has been recognized by a relatively small portion of the investor community. As a result, we find that even after a strong surge this year, the price in our view remains undervalued. If the past is a prologue, the stock has much upside left as we move toward mid-year.

Red Rock Resorts does have its fans and proves it

We’re comparing the stock this year to date with quality peers active in the locals market. So there are true believers in RRR, but the price differential tells us there is much run room ahead. Peers are great companies, largely recognized because of their high visibility in a growing macro market.

Stock Oct 2023 low Price at writing

Caesars $38.78 $38.04

Boyd 53.00 53.12

RRR 39.31 57.34

Of course, there are bull and bear cases for each stock and their positions reflect market sentiment driven by variable factors. But in the case of RRR, we believe that key catalysts have remained unsung. J.P. Morgan has reported bullishly on the stock, as have others. But the overall sense one gets about its performance is that there is much more to RRR than what appears on the surface. That is a transaction penchant for growth.

RRR owns (no RETs) 17 locals casinos strategically sited in Clark County – Las Vegas – and its nearby environs. Its population of around 2.4m grew by 42% between 2003 and 20023. It is projected to reach 2.9m at the end of this year. However, the key lies in the demos. Its population of 65 and over grew at 5.6X that of younger cadres. The irony here is that the strip properties pursue the younger populations like Millennials and Gen Xers with marketing policies and capex investments in amenities.

The difference lies in targeting the most valued local players and not worry about others. For the locals market, here is the golden profile: Older, retired or semi-retired early oldsters with fixed incomes above the average of visitors to the town. They are full-time residents, they own homes of average higher value.

The all important job market runs 2.2% above the U.S.

Their cost of living is a whopping 72% cheaper than other western states. The average visitation frequency runs twice a month. The majority of refugee residents are coming from California. So covid played a role in the huddled masses. The primary driver has been escape from the skyrocketing taxes and perceived deterioration in lifestyles they had long enjoyed.

Briefly, RRR operates in the second-largest gaming market in the U.S. with a foundational economic stability and a higher than average per capita win without the component of high end and international play.

Capsule RRR metrics will resonate in 2Q24

Net revenue 2022: $475

Net revenue 2023: $1.7b. Overall portfolio acquisitions. Expect further sales growth with the opening of the Durango property in late 2023.

RRR growth rate 37.7%

EPS growth rate: 40.5%

Hospitality industry growth rate: 19.5%

Revenue growth: 0.07%

ROE: 138.5%

Net margin: 10.2%.

An acquisitive strategy includes 441 in development acreage owned by RRR strategically positioned to feed the future addition to the property portfolio. All this land is owned in full. RRR estimates the value at $900m. We have checked with our local realty sources. All agree the land, or whatever reason, is considerably undervalued. We went over the maps with a major player in Vegas realty, attempting to select a theoretical best-case series of potential development.

Whether that means RRR will take the sweet spots or not and put down future property footprints or just sell off the land to developers, our source said:

“You can make the case that the land is undervalued, by a significant number. That all depends on a sustained population increase by Nevada officials that the target population growth of Clark County will bring it past 4m by 2028.”

The new Durango brings a fresh competitor, still early in the game, to areas close enough to go head-to-head with existing competitors. Yet, its luxe design and amenities are clearly also aimed at potential tourists who may be seeking something of an upscale experience off the noise and crowds of the strip.

Above: The new Durango is upscale compared to many nearby peers

The property has all the bells and whistle decors that separate in from local peers and that will work during its early days. But the mindset of locals customers is often set in stone. They have come to expect cheaper food and drinks, generous comp policies and competitive room rates at locals places. RRR management has been long schooled in the psyche of that customer.

The 200-room property cost $793m to build and does not face an unrealistic hurdle rate in our view to become an accretive contributor to group earnings by the end of the year. Right behind it is the 8,500 upscale homes Inspirada housing development. RRR is already eyeing as a potential location in the suburban Henderson area.

Conclusion

RRR sits in what we consider to be a perfect confluence of circumstances and events that merges into a value buy still under the radar. You have a demo that is growing. It is one precisely targeted to service customers with stable incomes and overall growth related to refugee arrivals from California, and other states. Add to that basic metrics that prove its strong growth arc over 5 years when it emerged from its STATION casinos origin.

It shares in common the casino family DNA (Ferttita – RRR, Boyd – BYD, Binion – Horseshoe, Farahi – Monarch), where customer service smarts have been driven to a high art. And coupled with savvy asset allocation, they have positioned their companies to over-perform. Among them, RRR stock is beginning to raise its visibility as investors see the results sustained.

In evaluating the progress of RRR over the past two years, I see it having a growing presence in the locals market, forming a widening positive consensus that could support a price target somewhere in the $68 to $70 range. It’s a buy that’s been under the radar far too long, given the outlook for its near-time future.