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Bear of the Day: Red Rock Resorts (RRR)

Eric Dutram

Things appear to be looking up for Las Vegas lately.

The city recently scored an NHL franchise, and it now looks to take the Raiders from Oakland as well. And with a massive new stadium for the Raiders, there is hope that several high profile events—and plenty of new tourists—will be hitting Sin City in the coming years.

However, while this has acted as a nice boost to companies in the Vegas market, investors can’t simply buy up any company with big operations in the city. Take Red Rock Resorts (RRR) for example. The company operates casinos and resorts through its holding company (Stations Casinos) and includes brands such as Palms, Red Rock, Green Valley Ranch, and Palace Station to name a few, giving it a Vegas-centric profile. And while it definitely has a Vegas focus, the company is actually seeing sliding earnings estimates as of late and investors may actually want to consider avoiding this name in the near future.

Sliding Estimates

While RRR beat estimates in its most recent report, it wasn’t all good news. The company reported sluggish results on the sports revenue front, while food and beverage costs were a bit elevated too. Additionally, RRR saw margins drop over 500 basis points while some key properties—such as the Palms—reported EBITDA figures well off of the peaks. Clearly, there was more to the story for Red Rock than a simple earnings beat, suggesting that some near term sluggishness might be in the company, no matter what is slated down the line for the area.

In the wake of this report, investors have actually seen all of the new estimates for RRR stock go lower in the past two months, as not a single analyst has raised their expectations for RRR in our consensus over the past 60 days. Instead, we have seen six estimates go lower for the full year, and another three go lower for the following year.

The magnitude of these estimate cuts has also been troubling, as the consensus estimate has fallen from $1.55/share to $1.37/share in just the past thirty days, while we have seen a 16% cut for the current quarter estimate as well. But worst of all, we have seen the most recent estimates—and thus those with the most up-to-date information—plunge as of late, so now the most accurate estimate is lower than the consensus for both the current quarter and the current year as well.

Red Rock Resorts, Inc. Price, Consensus and EPS Surprise

Red Rock Resorts, Inc. Price, Consensus and EPS Surprise | Red Rock Resorts, Inc. Quote

 

No wonder RRR has earned itself a Zacks Rank #5 (Strong Sell) and why we are looking for underperformance from this name in the near future.

Other Choices

Fortunately for casino-focused investors, there are a few better ranked choices out there that could be decent alternatives. Several of the other Vegas-focused casinos have ranks of at least ‘hold’ but investors may want to look to Pinnacle Entertainment (PNK) instead.

PNK has exposure in a number of domestic gaming markets, and it also has a Zacks Rank #2 (buy) as well. Estimates have also more than doubled for the full year in the past two months, making it a solid choice for investors interested in this industry. So, if you want some casino exposure right now, consider a more diversified approach such as PNK over RRR, at least until Red Rock can turn things around on the earnings estimate front.

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