Red Rock Resorts: Betting on the Gambling Comeback

Red Rock Resorts (RRR) is a casino and entertainment facilities operator in the United States. The company’s properties are primarily located in Las Vegas. However, they are not on the famous Las Vegas Strip. The core audience is the Las Vegas Locals market.

I am bullish on RRR stock. (See Analysts’ Top Stocks on TipRanks)

Focus on the Locals

Many people may not know that the Las Vegas Locals market, casinos that are off The Strip, is larger than all of New Jersey, the next largest market.

According to Red Rock Resorts, the Las Vegas Locals market was worth more than $2.7 billion over a 12-month period ending September 2021 compared to just $2.4 billion for New Jersey, which includes Atlantic City. In addition, 90% of the Las Vegas population lives within five miles of a Red Rock Resorts-owned casino.

The focus on locals also comes with less risk from travel restrictions due to COVID-19. New variants and travel restrictions or fears are still major risk factors for casino operators. After casinos reopened in 2020, those catering to local populations quickly returned to form.

Management Focused on Profitability

Red Rock Resorts management used the pandemic as a chance to focus on the company’s core and most profitable offering: gambling. Because of this, top-line revenue remains under 2019 levels; however, gross profit, operating profit, and net income are far outpacing any point in recent history.

In Q3 2021, the company earned $143 million in operating income against just $48 million in Q3 2019. The company pulled in $118 million in net income against a $27 million net loss for these same periods.

In fact, the company has come back so strong and created so much free cash flow that the Board of Directors declared a $3.00 per share special dividend on November 10, payable to shareholders of record on November 23. At the time, the stock was trading near $50 per share, so this amounted to a yield of about 6%. Not too shabby.

While it may be too late to get in on this action, the willingness of the company to reward shareholders indicates that such a dividend could very well happen again in the future.

Stock Price and Valuation

Red Rock Resorts stock has come back in a major way from when it traded in the single digits early in the Spring 2020 pandemic crash. It now trades at around $49 per share and has gained more than 100% over the last twelve months. The stock trades at a forward P/E ratio over 36, which is elevated. However, because of its excellent cash flow metrics, it trades at a forward EV-to-EBITDA ratio of under 9x.

There is also much room for growth. The company is currently planning construction on a new casino resort in Southwest Las Vegas. This brand new construction will serve an area of the city that is devoid of major competition.

The area is also quite affluent and growing rapidly. According to Red Rock Resorts, it is the fastest-growing area of the city, and there are no gaming competitors within a five-mile radius. Construction is slated to commence in Q1 2022.

Wall Street’s Take

Turning to Wall Street, Red Rock Resorts boasts a Strong Buy consensus rating, based on four Buys and one Hold rating assigned in the past three months. The average Red Rock Resorts price target of $61.00 implies 24.5% upside potential.

Red Rock Final Thoughts

Red Rock Resorts management had guided the company through the worst disaster for gaming in recent memory. The focus on profitability has paid off handily, and shareholders were rewarded with a special dividend that yielded more than 6% when announced.

While top-line revenue is still down slightly, the bottom line has improved significantly. New endeavors will create unique opportunities for further growth, and the focus on the local population cuts down on the risk from a potential travel slowdown. I believe Red Rock Resorts is a great stock to own in order to capitalize on the gambling comeback.

Disclosure: At the time of publication, Bradley Guichard had a position in securities mentioned in this article.