CBRE analyst John DeCree has moved Red Rock Resorts from the hold category to buy, saying he’s seeing no sign of softness in Las Vegas. He’s also bullish on the opening of the Durango Casino & Resort in November and the company’s long-term expansion in the valley.
In a note to investors Monday, DeCree said the shares have pulled back 20% since their year-to-date high of $50.66 in July and reiterated a price target of $53, which he said implies an 11-times multiple of its 2024 fiscal-year adjusted EBITDA estimate of $780 million, which creates “a compelling buying opportunity for long-term investors.”
DeCree and his team recently met with Red Rock management. One key to his analysis of the continued strength of the Las Vegas market is the opening of the Durango on November 20. The company also has a deep pipeline of long-term growth prospects across the Las Vegas valley, he said.
“By this point, we had expected some degradation in locals’ market trends, either gaming revenue, margins, or both, and yet we see continued strength in core customer segments, stable business volumes, and virtually no sign of softness,” DeCree said. “We attribute this to the strong local economy, supported by the accelerated migration of high-net-worth households to Las Vegas during the pandemic; robust business trends on the Strip; higher interest rates supporting incomes of retirees; low unemployment; and strong wage growth.”
DeCree doesn’t expect the locals market to be immune to a broader recession, but permanent cost cuts, real population growth, and gaming-supply reductions across the valley have set a new normal for locals operators.
As for the debut of the new property, DeCree has generally “modeled a more conservative ramp at Durango and greater cannibalization at Red Rock Resort than most of our peers. However, given the recent pullback in the shares, valuation is attractive even on our below-consensus forecast, creating a favorable entry point for long-term investors.”
DeCree expects that Durango could be profitable out of the gate, although they don’t expect the 15% to 20% annual cash/cash return target to be realized until 2025 or 2026. “That said, the opening of Durango could be a major turning point, allowing the company to quickly deleverage the balance sheet,” DeCree said. “With a higher cash-flow base after Durango ramps, Red Rock Resorts could potentially self-fund its future growth prospects, reducing balance sheet or capital markets risk related to long-term growth.”
In addition to Durango, Red Rock has a deep pipeline of long-term growth opportunities throughout Las Vegas and DeCree suspects that the next project would likely be the second phase at Durango, which would presumably “be the lowest risk/highest ROI opportunity based on visible demand and time to completion.”
Although timing and specifications for the second phase are a moving target, management suggested it would likely include some level of tailored non-gaming entertainment alongside more gaming supply.
“Beyond Phase 2, Red Rock Resorts controls several gaming-entitled sites located throughout the city in high-income and rapidly growing ZIP codes, positioning the company to grow with the overall local economy,” DeCree said. “Away from Las Vegas, the North Fork project (a tribal casino in California) is inching closer to getting off the ground, pending National Indian Gaming Commission approval of the management contract, which is seemingly the last major milestone remaining.”
