Analyst: Durango, growth in Las Vegas and California cited in Red Rock Resorts “Buy” recommendation

Home » Analyst: Durango, growth in Las Vegas and California cited in Red Rock Resorts “Buy” recommendation

David Katz has joined other Wall Street analysts in their bullishness on Red Rock Resorts’s stock, led by the success at its Durango Casino & Resort, development of a new casino in west Henderson, and the debut of their California tribal casino.

Red Rock will also get a boost from opening several taverns by the end of the 2024 fiscal year, Katz said.

After meeting with Red Rock executives last week, Katz, an analyst with Jefferies Equity Research, reiterated a “Buy” rating for the stock, upping the price target from $65 to $71. The stock closed at $61.55 on Friday. It was $38.13 on Nov. 1 prior to Durango’s opening in early December and $49.79 on Jan. 12.

Katz detailed the investor meetings last week with Red Rock executives that provided further insights into its strategic outlook.

“Commentary on operations in Las Vegas locals remains bullish, led by Durango’s success, further development projects and cost management strategies,” Katz wrote to investors. “We fine-tune our optimistic estimates for the first quarter of 2024, including updated balance-sheet info and maintain our overall bullish view with further validation driving higher multiples.”

Katz noted that Durango’s performance is strong, with management indicating margin improvements in the near term. Since opening four months ago, Durango has developed a core consumer base and received positive customer feedback, with hotel occupancy at 90%-plus and company-wide average daily room rates. Management is focused on player development and database growth, while curtailing costs, to drive top-line growth and margins, he added. On cannibalization, management reiterated its prior expectation of 10% across the portfolio, primarily at its Red Rock Casino Resort in Summerlin.

Red Rock Resorts’s land bank of 441 acres supports future development and Katz said following the opening of Durango, management is evaluating two options.

The first is the second phase of Durango that includes a parking garage, high-limit poker tables, additional slot machines, and more hotel rooms. The second option is its undeveloped site in the Inspirada subdivision in west Henderson, which allows Red Rock an opportunity to expand into an under-penetrated.

There’s also potential for further earnings growth with Red Rock’s North Fork Mono Casino & Resort tribal project north of Fresno, California, with expected development to start in the fall and take 18 months to complete.

Red Rock also expects to open a total of seven taverns by the start of its 2026 fiscal year; several facilities will open by the end of the 2024 fiscal year.

“Management indicated its full-scale taverns segment should operate between 16 and 20 units, expected to generate 20% ROI,” Katz said. “Taverns are compelling, because the typical demographic skews toward younger, male, and sports wagering-oriented, which is accretive to Red Rock Resorts’s core business.”

Technology remains a focus for customer engagement and cost management, Katz wrote. Red Rock’s new all-in-one app launched last year allows customers to access funds digitally and provides amenities in a single channel.

“The increased digital presence provides for less tangible mailing operations and notional multi-million-dollar cost savings,” Katz said. “As well, the company is beginning to incorporate specific AI technologies into its operations, providing for more customer specific experiences.”

In upgrading its price target to $71 from $65, Katz said Jefferies updated their first quarter and 2024 revenue and adjusted earnings. They also updated their balance sheet for recent capital-market activities.

Their updated first-quarter estimates are $494.8 million in revenue and $210 million in adjusted earnings versus prior estimates of $506.2 million and $218.6 million, respectively. The 2024 estimates are $1.93 billion in revenue and $813.9 million in adjusted earnings versus $1.95 billion and $822.8 million previously.

“Taken in total, we believe the commentary confirms the long-term growth path, which warrants higher multiples,” Katz wrote.

In citing a $71 price target, Katz said they expect Durango to reach adjusted earnings of $140 million by 2026; the company will sell excess land over the near-term and announce plans for the next project after the Durango addition is completed.

There’s an upside potential of $88 million if Durango is ramping up faster than expected and generating more than 20% ROI without cannibalizing existing properties, Katz wrote. That target would also be helped in continued strength of the Las Vegas locals’ market and if the company executed on its growth plan ahead of schedule.

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