Durango Casino Resort's Expansion And Strategic Investments Promise To Elevate Market Dominance And Profits

Key Takeaways

• Expansion and reinvestment strategies at properties like Durango Casino Resort are aimed at boosting visitation, gaming revenue, and enhancing non-gaming revenue segments.
  
• Strategic growth initiatives, coupled with a balanced capital management approach, are designed to capitalize on market trends and enhance shareholder value.
  
• Expansion and increased amenities at properties like Durango come with financial and operational risks that could affect short-term earnings and margins.

Catalysts

Through its interest in Station Casinos LLC, develops and operates casino and entertainment properties in the United States.

• The Durango Casino Resort's strong financial performance and customer acquisition strategy are likely to increase visitation and revenue, positively impacting net revenue and earnings.
  
• Expansion plans for the Durango property, including adding over 25,000 square feet of casino space and 230 slot machines, are expected to enhance gaming experiences, drive further foot traffic, and consequently increase gaming revenue.
  
• Reinvestment in existing properties to deliver fresh and relevant amenities demonstrates a focus on driving incremental visitation and spend, which could boost non-gaming revenue segments like food, beverage, and entertainment.
  
• The significant level of free cash flow generation and its allocation towards long-term growth strategy, debt paydown, share repurchases, and dividends indicate a balanced approach to capital management, likely enhancing shareholder value and earnings per share.
  
• The development of new projects like North Fork, coupled with an efficient management of expenses and existing property enhancements, suggests a strategic growth trajectory aimed at capitalizing on favorable demographic trends and high barriers to entry in the Las Vegas market, potentially increasing market share and long-term profitability.

Assumptions

• Analysts are assuming Red Rock Resorts's revenue will grow by 5.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 9.2% today to 12.1% in 3 years time.
• Analysts expect earnings to reach $261.2 million (and earnings per share of $2.69) by about October 2027, up from $170.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $288.1 million in earnings, and the most bearish expecting $199.2 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 34.1x on those 2027 earnings, up from 18.8x today. This future PE is greater than the current PE for the US Hospitality industry at 23.6x.
• Analysts expect the number of shares outstanding to grow by 1.08% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 8.46%, as per the Simply Wall St company report.

Risks

• The company is experiencing cannibalization at its Red Rock property due to the opening of the Durango Casino Resort, which could temporarily impact revenues at the Red Rock location.
  
• Although revenues and adjusted EBITDA are increasing, the adjusted EBITDA margin has decreased slightly, indicating rising costs or inefficiencies that could affect net profit margins if not managed.
  
• The company has a significant level of debt ($3.47 billion), and its net debt-to-EBITDA ratio is 4.2x, hinting at potential financial leverage risks which could impact its ability to generate net income positively if the cost of debt rises or if EBITDA declines.
  
• The expansion plans for the Durango property will increase operational size but also come with construction and operational risks that might affect short-term earnings until the expansion generates expected returns.
  
• As Red Rock Resorts invests in more amenities and expansions, including the Durango expansion and the potential Inspirada project, the execution and capital allocation risks increase. Missteps in these investments could impact revenues and margins.

Valuation

• The analysts have a consensus price target of $64.57 for Red Rock Resorts based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $72.0, and the most bearish reporting a price target of just $55.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $2.2 billion, earnings will come to $261.2 million, and it would be trading on a PE ratio of 34.1x, assuming you use a discount rate of 8.5%.
• Given the current share price of $54.12, the analyst's price target of $64.57 is 16.2% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.