Durango Casino And Las Vegas Projects Will Boost Customer Engagement

Key Takeaways

• Expansion and strategic reinvestments are expected to boost Red Rock Resorts' revenue through increased visitation and enhanced customer experience at key properties.
  
• Disciplined cost management and efficient capital allocation are projected to sustain high margins, supporting stronger future earnings and investment returns.
  
• Red Rock Resorts faces risks from high debt, potential project delays, revenue cannibalization, and dependency on Las Vegas, threatening profitability and financial stability.

Catalysts

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

• The successful performance and expansion of the Durango Casino Resort is increasing visitation and customer engagement, especially with the addition of 95,000 new customers and plans for further expansion, which is expected to boost future revenue.
  
• The strong demographic growth in the Las Vegas Valley, particularly with new housing developments in Summerlin, is likely to support future revenue growth as it increases the local customer base.
  
• Strategic reinvestments in existing properties such as Sunset Station and Green Valley Ranch, aimed at enhancing amenities and customer experience, are expected to improve revenue and net margins through higher visitation and increased spend per visit.
  
• The construction progress and finance securing of the North Fork project ensures controlled cost structures and returns investment capital, which will positively impact earnings and allow for better capital allocation.
  
• The disciplined cost management and utility savings are expected to support high margins, evidenced by a near-record adjusted EBITDA margin this quarter, which should translate into stronger future earnings.

Red Rock Resorts Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Red Rock Resorts's revenue will grow by 2.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.0% today to 9.7% in 3 years time.
• Analysts expect earnings to reach $201.8 million (and earnings per share of $1.88) by about May 2028, up from $156.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $226.0 million in earnings, and the most bearish expecting $164.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 33.6x on those 2028 earnings, up from 16.5x today. This future PE is greater than the current PE for the US Hospitality industry at 21.9x.
• Analysts expect the number of shares outstanding to grow by 0.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.35%, as per the Simply Wall St company report.

Red Rock Resorts Future Earnings Per Share Growth

Risks

• The construction and expansion projects at Red Rock Resorts, while aimed at growth, could face risks associated with higher-than-anticipated costs or delays, which could impact net margins and profitability.
  
• The company is experiencing cannibalization of revenue at its Red Rock property due to the opening of the Durango Casino Resort, which, despite improvement, still poses a risk to future revenue recovery.
  
• High levels of debt, with a total principal amount of $3.4 billion and a net debt-to-EBITDA ratio of 4.1x, may put pressure on earnings and limit financial flexibility during economic downturns.
  
• Rising insurance costs have been noted as a potential headwind, which could affect overall profitability and net margins in the future.
  
• Red Rock Resorts' reliance on the Las Vegas local market means that any downturn in this market due to economic recession could adversely affect revenue and overall financial performance, despite current demographic growth projections.

Valuation

• The analysts have a consensus price target of $50.417 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 $58.0, and the most bearish reporting a price target of just $43.0.
  
• 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 $201.8 million, and it would be trading on a PE ratio of 33.6x, assuming you use a discount rate of 9.3%.
  
• Given the current share price of $43.33, the analyst price target of $50.42 is 14.1% 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.