Here's Why You Should Retain Red Rock Resorts' (RRR) Stock
Red Rock Resorts, Inc. RRR will likely benefit from increased visitation, new amenities offering and repositioning of the land portfolio. Also, the emphasis on the Durango development project bodes well. However, an uncertain macroeconomic environment and inflationary pressures are a concern.
Let us delve into the factors that highlight why investors should retain the stock for now.
Factors Driving Growth
Favorable Trends: Red Rock Resorts benefits from a rise in visitation and strong spending per visit across its portfolio. Attributes such as strong and consistent visitation from guests (including a younger demographic), increased spending per visit, more time spent on gaming devices and the return of core customers are positives. Also, it reported growth in food and beverage and hotel segments fueled by higher average checks and strength in the catering business. With group business returning, the momentum will likely persist in the upcoming periods. Per our model, the company’s 2023 food and beverage and room revenues will likely witness growth of 7.6% and 7.4%, respectively, year over year.
Development Pipeline: Red Rock Resorts continues to focus on development projects to drive growth. During the second quarter, the company stated progress concerning the Durango development project. During the quarter, the company emphasized expanding its casino area with additional gaming positions. It is of the opinion that a larger casino footprint will better align the product offering given the backdrop of favorable demographics surrounding the Durango region. With solid progress reported (as of June 2023), the company anticipates opening the project by fourth-quarter 2023. The company expects Durango's return profile to be similar to its previous greenfield projects.
Expansion Efforts: Increased focus on Las Vegas expansion and investing in new amenities bode well for the company. During the second quarter of 2023, the company announced the opening of Polaris, a high-end casino bar located (at Green Valley Ranch Resort) and reported solid customer feedback with respect to the same. Backed by the successful openings of high-limit table and slot rooms as well as a new casino bar and a Red Rock Casino Resort, the company remains optimistic. It intends to boost investments in this direction. This, in turn, is likely to pave the path for growth in the upcoming periods.
Divestitures: The company focuses on divestitures to drive growth. In June 2022, the company permanently closed its Texas Station, Fiesta Henderson and Fiesta Rancho properties owing to the coronavirus crisis. The facilities at these properties are being demolished to reposition the land for sale. In September 2022, the company announced the closure of Wild Wild West. It intends to divest specific land parcels to reposition its real estate portfolio for growth at Station Casinos. In 2022, the company sold approximately 113 acres for $118 million in proceeds. The company intends to divest almost 120 acres of land to reposition and upgrade its real estate portfolios for growth.
Concerns
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So far this year, shares of Red Rock Resorts have gained 11.2% compared with the industry’s 23% growth. The downside was mainly due to inflationary pressures, increased energy costs and rising interest rates. During the second quarter of 2023, the company witnessed price inflation in ordinary goods and services such as food costs, supplies, energy costs and construction costs. During the second quarter, food and beverage expenses increased 5.3% year over year to $60.9 million. Moving ahead, the company anticipates the headwinds to persist for some time. For 2023, our model predicts food and beverage expenses to rise 5.9% year over year to $238.1 million.
Although the company derives a significant portion of its business from Las Vegas, the uncertainty in the economic environment remains a concern for the company. The unemployment rate in the Las Vegas metropolitan region increased from 5.7% in June 2022 to 6.0% in June 2023. In June 2023, the state's unemployment rate was 5.4%, up from 4.7% in June 2022. Per the Las Vegas Realtors, the typical price of an existing single-family home in Las Vegas in June 2023 was $440,990, down 8.1% from $480,000 reported in June 2022. Moving ahead, the company remains cautious of the uncertain economic environment, which may affect the company’s results in the near term.
Zacks Rank and Stocks to Consider
Red Rock Resorts currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the Zacks Consumer Discretionary sector are:
Royal Caribbean Cruises Ltd. RCL sports a Zacks Rank #1 (Strong Buy). RCL has a trailing four-quarter earnings surprise of 28.5% on average. Shares of RCL have gained 138.3% in the past year. You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for RCL’s 2023 sales and EPS indicates a rise of 54.5% and 180.3%, respectively, from the year-ago period’s levels.
Trip.com Group Limited TCOM flaunts a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 147.9% on average. Shares of TCOM have increased 59.7% in the past year.
The Zacks Consensus Estimate for TCOM’s 2023 sales and EPS indicates a rise of 104.9% and 537.9%, respectively, from the year-ago period’s levels.
Skechers U.S.A., Inc. SKX sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 39.1% on average. Shares of SKX have increased 3.8% in the past year.
The Zacks Consensus Estimate for SKX’s 2023 sales and EPS indicates a rise of 8.7% and 42%, respectively, from the year-ago period’s levels.
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