Red Rock Resorts (NASDAQ:RRR) posted another set of impressive margin gains in the fourth quarter, prompting one analyst to say the stock could be undervalued if that trend continues.
In the last three months of 2021, Red Rock earned $1.66 a share on revenue of $422.35 million. Wall Street expected earnings per share of 52 cents on sales of $409.04 million. That’s an impressive beat, and has the stock higher by almost four percent in midday trading.
After a decline in the third quarter, Red Rock margins resumed accelerating in the October through December period — an impressive feat, when factoring in the emergence of the omicron variant of the coronavirus and still lingering mask mandates in Nevada.
It would have been interesting to see what margins would have looked like under a more normalized environment. Longer term we continue to believe spending/visitation trends will remain relatively healthy across the Las Vegas locals,” said Stifel analyst Steven Wieczynski in a note to clients.
He rates Red Rock “neutral,” with a $55 price target, down from $58. That new forecast implies upside of more than 27 percent from the Feb. 2 close.
Loving Las Vegas Locals
In addition to its eponymous casino-resort and Green Valley Ranch, Red Rock operates seven casinos under the Stations brand, seven Wildfire venues, and several other locals-focused venues, all of which are strewn across the Las Vegas Valley.
Las Vegas locals include a variety of customers, spanning staffers from Strip casinos to well-heeled retirees that moved to Nevada to enjoy a lower cost of living. While unemployment trends are improving in Las Vegas, Nevada still has the second-worst jobless rate in the country, trailing only California. Wieczynski believes steadiness in some locals segments would bolster the case for Red Rock shares going forward.
“While the Las Vegas economy has undoubtedly diversified since the Great Recession, and a growing retiree base has made Locals operators less dependent on service/construction employees, we continue to believe the fiscal health of the latter segment needs to be restored in order for RRR to thrive from here on out,” says the analyst.
He adds that still slack convention business could present headwinds to Red Rock’s namesake venue in Summerlin and Green Valley Ranch this year.
Red Rock’s Fiesta Henderson, Fiesta Rancho, and Texas Station remain closed. On the company’s earnings conference call, CFO Stephen Cootey said the operator is only going to reopen “properties we’re confident we can deliver incremental value to the overall portfolio.”
Red Rock Stock Could Be Undervalued
Shares of Red Rock are up 92.33 percent over the past year and with macroeconomic factors still hampering the Las Vegas region, investors may need to be patient with the stock.
Wieczynski notes 2023 could be the year in which Red Rock posts notable gains, but adds pullbacks present buying opportunities.
“At this point we believe any type of material pullback in RRR shares would cause us to reevaluate our neutral stance. We think this story becomes more attractive by the day and while we model a deceleration in margins moving forward, if we are wrong, shares are massively undervalued at current levels,” he said.
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