Expansions At Durango And Population Growth Will Improve Customer Experience

Key Takeaways

• Expansion of Durango Casino Resort and strategic reinvestment in existing properties are expected to drive revenue growth and improve customer retention.
  
• Population growth in Las Vegas and the new North Fork resort in California will contribute to long-term revenue and customer base expansion.
  
• Significant debt and rising costs, coupled with potential cannibalization effects, could strain financial stability and impact Red Rock Resorts' profitability short-term.

Catalysts

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

• The continued growth and operational performance of Durango Casino Resort, which remains on track to become one of Red Rock Resorts' highest margin properties, is expected to drive incremental revenue and earnings growth.
  
• The expansion of the Durango master plan will add significant new casino space and amenities, potentially boosting revenues and improving customer experience and retention, impacting future revenue growth positively.
  
• Strong population growth in the Las Vegas Valley, notably in Summerlin, where significant residential development is underway, is expected to drive increased visitation and customer base expansion, contributing to long-term revenue growth.
  
• Strategic reinvestment in existing properties like Sunset Station and Green Valley Ranch, aimed at enhancing amenities and attracting more guests, is likely to yield higher future revenues and potentially stabilize or improve net margins.
  
• The development of the North Fork resort in California, expected to open in mid-2026, is anticipated to open up a new market and drive significant new revenue streams, thus impacting overall earnings growth positively.

Red Rock Resorts Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Red Rock Resorts's revenue will grow by 2.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.9% today to 10.0% in 3 years time.
• Analysts expect earnings to reach $211.5 million (and earnings per share of $2.21) by about March 2028, up from $154.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 36.8x on those 2028 earnings, up from 17.2x today. This future PE is greater than the current PE for the US Hospitality industry at 23.3x.
• Analysts expect the number of shares outstanding to grow by 0.76% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.61%, as per the Simply Wall St company report.

Red Rock Resorts Future Earnings Per Share Growth

Risks

• The ongoing construction and expansions, including those at Durango and Green Valley Ranch, could lead to disruptions that may negatively impact revenue and margins in the immediate term.
  
• The company's significant debt load of $3.3 billion and a net debt-to-EBITDA ratio of 4.1x could strain financial resources, particularly if borrowing costs increase or projected revenue growth does not materialize.
  
• Cannibalization effects from new properties like Durango on existing ones such as Red Rock indicate potential revenue displacement that might take several years to recover.
  
• Rising costs, notably in wages and food costs, could pressure margins further, impacting overall profitability if the company is unable to pass these costs onto consumers.
  
• The success of the North Fork project and its hefty $750 million budget hinge on various factors, including tribal gaming compacts, and any delays or issues could adversely affect projected revenue streams and financial stability.

Valuation

• The analysts have a consensus price target of $56.75 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 $63.0, and the most bearish reporting a price target of just $49.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $2.1 billion, earnings will come to $211.5 million, and it would be trading on a PE ratio of 36.8x, assuming you use a discount rate of 9.6%.
• Given the current share price of $44.59, the analyst price target of $56.75 is 21.4% 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.