Shares of Red Rock Resorts (NASDAQ: RRR) tumbled Wednesday despite solid second-quarter results as some analysts took issue with the stock’s rich valuation.
The regional casino operator reported earnings per share of 59 cents on revenue of $486.4 million for the June quarter. Analysts expected earnings of 43 cents on sales of $475.81 million. Shares of Red Rock, which are lower by 5.82% at this writing, trade close to 11x 2025 earnings before interest, taxes, depreciation, and amortization, sparking concern that the stock might be overvalued at this juncture. It’s up 9.08% over the past month.
Valuation aside, the company and some analysts remain bullish on the Durango Casino & Resort in Southwest Las Vegas, the operator’s newest property. On Red Rock’s earnings conference call, CFO Stephen Cootey discussed the company’s expansion plans at the new venue.
Our current plans for the next phase of Durango will add over 25,000 square feet of additional casino space, including a new high-limit slot and bar area,” said Cootey. “In total, the expansion will add to the Durango casino floor an additional 230 slot machines, including 120 slot machines dedicated to our new high-limit room.”
The expansion, which will also include nearly 2,000 new parking spots, is in the budgeting and planning stages and could commence later this year, according to the Red Rock chief financial officer.
Red Rock Stands Out Among Regional Casino Stocks
With the benefit of the aforementioned 9.08% gain over the past month, shares of Red Rock are up 9.14%, making it one of the best-performing names in the mostly moribund regional casino space.
That indicates the Las Vegas locals market — Red Rock’s only operating jurisdiction — is proving more vibrant than other regional casino locations and that while Durango is pilfering business from the operator’s namesake casino hotel in Summerlin, that situation will shift over time due to the population boom in the Las Vegas Valley.
“There is no doubt about it, RRR remains one of the more compelling stories right now within the lackluster regional gaming,” wrote Stifel analyst Steven Wieczynski in a note to clients. “The Las Vegas locals market continues to outperform all other regional gaming markets by a wide margin. And with RRR essentially taking market share given their better/new asset quality, it doesn’t surprise us shares have outperformed regional gaming peers so far year-to-date.”
While there is some cannibalization between Durango and Red Rock, the revenue from the new property was important to the operator in the second quarter because there were disruptions at Palace Station and Sunset Station that affected traffic at those properties.
Red Rock Financial Picture Sturdy
Red Rock concluded the second quarter with $136.4 million in cash and $3.5 billion in debt, and the operator has a net leverage ratio of 4.3x. Wieczynski said it would be beneficial to see that ratio decline, noting that could be accomplished via real estate sales.
Red Rock owns all of the land on which its casinos reside and when it sells property, it’s never to a gaming company nor does the operator engage in sale-leaseback transactions. Even without real estate sales, the gaming company is turning EBITDA into free cash flow (FCF) at an impressive rate.
“We continue to be impressed at how RRR is managing/running their business at this point and converting more EBITDA into FCF which has/should rapidly improve (relatively speaking as their balance sheet is already pretty clean compared to peers) their balance sheet,” concluded Wieczynski. “Durango should deliver returns at or in excess of RRR’s historical average for greenfield projects (~20%), and they noted margins are already run-rating around the portfolio average today and improving every day.”
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