Red Rock Exhibits Strong Margin Resilience, Says Analyst

Red Rock Resorts (NASDAQ: RRR) has several structural advantages that suggest the casino operator’s profit margins are more durable than many investors currently recognize, according to one analyst.

In a recent note to clients, Deutsche Bank analyst Carlo Santarelli pointed out that Red Rock’s property-level margin growth is more sustainable than the market perceives. Santarelli outlined several key factors supporting this perspective.

“The three main drivers we break down are: 1) the current portfolio compared to 2019’s, 2) gaming promotions, which, while not as structural, are currently quite beneficial, and 3) the food and beverage segment,” the analyst wrote.

Indeed, Red Rock’s portfolio looks significantly different today compared to before the COVID-19 pandemic. The company permanently closed several properties, including Fiesta Henderson, Fiesta Rancho, and Texas Station, and sold the Palms Casino at a loss. On the other hand, Red Rock opened the new Durango Casino in Southwest Las Vegas last December, which has shown a strong start.

Market Underestimates Red Rock’s Changes

Following the pandemic, Red Rock and other casino operators saw immediate margin boosts by cutting less profitable non-gaming offerings like low-end dining and entertainment. However, some investors and analysts questioned whether these margin improvements could be sustained, expecting a return to previous norms in key gaming markets. Santarelli, however, believes the market isn’t fully appreciating Red Rock’s situation.

“While the main pushback we receive regarding our positive view of RRR relates to valuation, we also think there’s significant concern about whether the margin outperformance compared to 2019 is sustainable. Many are not recognizing the real structural changes driving most of this margin improvement, changes that are not tied to operational performance or the competitive landscape,” he said.

Santarelli also noted that Red Rock is likely to maintain margin growth, even if revenue faces challenges.

Red Rock Outperforms Peers

So far in 2024, Red Rock’s stock is up 9.43%, making it one of the best performers among small-cap casino stocks and significantly outperforming broader small-cap indices. For comparison, the Russell 2000 and S&P Small Cap 600 indices have risen 6.7% and 5%, respectively, since the start of the year.

Notably, Red Rock’s strong performance comes despite concerns that its new Durango Casino may be taking business away from other properties, like its flagship casino in Summerlin, Nevada. Company executives have acknowledged this issue but expect it to balance out over time.