- Red Rock Resorts has experienced a bumpy ride over the past few years, particularly during the worst of the pandemic.
- A return to performance from prior years would indicate that shares are not all that appealing, but recent performance is encouraging.
- Recent figures indicate that it could offer some nice upside for long-term investors.
- Looking for a helping hand in the market? Members of Crude Value Insights get exclusive ideas and guidance to navigate any climate. Learn More »
These days, many investors who are interested in the casino and gambling markets tend to focus on one of two categories. Either they are interested in the larger players in the space, or they're drawn to the eSports gambling companies that have arrived on the scenes in recent years. But there are other opportunities out there to consider. More traditional casino operators that have smaller physical footprints than the majors can still be fertile ground for investors to consider. One particular prospect that comes to mind is a company called Red Rock Resorts (NASDAQ:RRR). Despite experiencing significant pain during the COVID-19 pandemic, the company has generally experienced steady growth. Cash flow, while volatile, has been significantly positive. And things are looking up in the current fiscal year. With shares of the company looking to be rather cheap and leverage under control, Red Rock Resorts could make for a good prospect for long oriented investors.
Understanding Red Rock Resorts
Red Rock Resorts acts as a holding company that owns an equity interest in and manages Station Casinos. Station, meanwhile, is a gaming, development, and management company that develops and operates casinos and other entertainment properties. As of the end of its latest fiscal year, the company owned and operated 10 major gaming and entertainment facilities. It also operated 10 Smaller casinos, three of which it holds a 50% interest in only. In addition to this, one of its subsidiaries manages the Graton Resort & Casino for its Native American clients. For its 19 properties that are located in the Las Vegas metropolitan area, it is worth noting that they are well placed. According to management, over 90% of the population in Las Vegas lives within just five miles of one of these properties. And 69% of residential development is located within 3 miles of one of its existing properties or one of the development sites that is owned by the company. Its final property, Palms, is one that is currently being sold in exchange for $650 million.
*Taken from Red Rock Resorts
One thing that management really likes to promote is the fact that a significant portion of the company's revenue comes directly from gaming activities. In fact, as of the third quarter of its 2021 fiscal year, approximately 70% of revenue came directly from gaming. This compares to the 22% to 24% of many of its larger competitors. Other services like rooms, food, beverages, and more account for the remaining 30% of sales the company brings in. This may have a lot to do with the composition of the customers who do frequent its locations. According to management, 62% of its slot revenue comes from local guests who, on average, visit multiple times per month. In fact, 34% of its slot revenue comes from customers who visit eight or more times per month. Another 15% comes from those visiting between four and seven times.
*Taken from Red Rock Resorts
At present, Red Rock Resorts is focused on changing around how some of its business operates. I already mentioned its Palms sale that should take place before the end of the year. The company is also running a property program that involves developing a 533,000 square foot property that will have over 73,000 square feet of casino floor space and over 2,000 slot machines with 46 table games. It will feature four full-service restaurants, 200 luxury rooms and suites, a pool, and over 20,000 square feet of meeting and banquet space. The company has also made moves and other opportunities like its North Fork project that is currently in design and with the land being held in a trust. Upon completion, the 305 acres could host a building with 2,000 slot machines and 40 table games.
Outside of project development, management is also focused on other ways to create value. For instance, earlier this month, the company announced plans to buy back $350 million worth of common stock priced at between $46 and $53 per share. Following this, the company plans to issue a special dividend of $3 per share that should cost the company about $344 million in all. Some of this cash will come from the issuance of a $500 million senior note that comes due in 2030 and that bears an annualized interest rate of 4.625%. But some will also use cash on hand and, likely, proceeds from the aforementioned Palms sale.
A bumpy ride
In recent years, the financial picture for Red Rock Resorts have been a bit mixed. After seeing revenue rise from $1.48 billion in 2016 to $1.86 billion in 2019, it then declined to $1.18 billion in 2020. This is to be expected though, given the nature of the COVID-19 pandemic. Fortunately for investors, this decline in sales did not last long. Revenue in the first nine months of the company's 2021 fiscal year, for instance, came in at $1.20 billion. That represents an increase of 42.5% over the $839.04 million the company generated the same time one year earlier. Management chalked some of this increase up to the hotel occupancy rate of the company growing from 70.4% to 74.5% in the course of one year. Over that same period of time, the average daily rate charged for its hotel properties grew 18.8% from $120.55 to $143.27. The company has also enjoyed a surge in casino revenue, with that metric rising in the latest quarter by 20.5% compared to the same quarter last year.
*Created by Author
On the bottom line, things have been much more volatile. The company's worst year pre-pandemic was in 2019 when it generated a net loss of $3.35 million. 2020 saw the company's bottom line worsen considerably, with the business generating a loss that year in the amount of $150.40 million. Fortunately, operating cash flow held up better. After hitting $316.63 million in 2019, it declined to $212.79 million in 2020. Over that same period of time, EBITDA fell from $509.02 million to $368.49 million. For the current fiscal year, things are looking up. Net income of $93.18 million in the first nine months of the company's 2021 fiscal year represents a significant turnaround over the $180.11 million loss achieved the same time one year earlier. Operating cash flow skyrocketed from $85.55 million to $476.82 million, while EBITDA jumped from $217.95 million to $551.33 million. In addition to benefiting from the rise in sales, the company also succeeded in cutting costs significantly. Over the past two years, management believes that cost reductions have been in excess of $200 million.
*Created by Author
Based on trailing 12-month figures for the current fiscal year, the company is generating net profits of $204.71 million and is generating operating cash flow of $604.06 million. Based on all of this, the company’s EBITDA should be around $701.87 million. Using these figures, we can effectively price the business. Adjusting for recently announced transactions, I figured that the company is trading at a price to operating cash flow multiple of about 8.9 and at an EV to EBITDA multiple of 10.9. This compares to the multiples of 17 and 15.1, respectively, if we use the company's figures from 2019. What's more, the overall leverage of the company, coming in at 3.3 times EBITDA, is not all that high.
*Created by Author
To put this pricing of the company into perspective, I then decided to compare the company to the five highest rated of its peers as defined by Seeking Alpha’s Quant platform. On a price to operating cash flow basis, these firms ranged from a low of 5.7 to a high of 16.1. If we use the company's results from its 2019 fiscal year, then it would be the most expensive of the group. But if we rely on the trailing 12-month figures of the business, then three of the five prospects are cheaper than it while the remaining two are more expensive. I then did the same thing using the EV to EBITDA approach, ending up with a range of 7.5 to 15.5. In both scenarios, four of the five companies were cheaper than Red Rock Resorts.
|Company||Price / Operating Cash Flow||EV / EBITDA|
|Golden Entertainment (GDEN)||5.7||7.5|
|Inspired Entertainment (INSE)||10.8||8.6|
|Century Casinos (CNTY)||7.8||7.8|
|Accel Entertainment (ACEL)||16.1||15.5|
|Everi Holdings (EVRI)||7.2||8.9|
At this point in time, Red Rock Resorts continues to reinvent itself and it is working on generating stronger performance for the current fiscal year than what it achieved in 2020. All things considered, the company appears to be a reasonable prospect for investors who like the casino space. Shares are attractively priced, though a return to performance achieved in 2019 suggests they might be fairly valued at best. But if we assume that recent financial performance is indicative of the long term outlook of the business, then it may make sense for investors to roll the dice on it.
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This article was written by
Daniel is an avid and active professional investor.He runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein. Learn more.
Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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