Shares of Red Rock Resorts, Inc. (NASDAQ:RRR) are up just six percent year-to-date, putting the operator of the Palms and Station Casinos well behind other regional gaming stocks.
The Las Vegas-based company recently reported third-quarter results that missed Wall Street estimates. Some analysts speculate that investors remain on the sidelines with the stock as they wait for cost-cutting initiatives at the Palms and the ramp-up of the Palace Station to bear fruit.
While RRR’s 3Q19 results showed a slight miss relative to consensus, we believe investor expectations were muted around the quarter, given the continued unknown around the Palms/Palace Station ramp,” said Stifel analyst Steven Wieczynski in a recent note obtained by Casino.org.
Recently, Red Rock CEO Frank Fertitta III announced the closure of Kaos, the once popular nightclub at the Palms, noting that the company will take $28 million in charges over the next two quarters related to shutting down that spot.
Fertitta cited the high cost of booking top-rate entertainment for the club, as well as a lack of benefit to the gaming area at the Palms as the reasons for Kaos being shuttered. The CEO believes the 73,000 square feet the venue club occupies can be better used in a different fashion.
Fertitta and his billionaire brother Lorenzo combine to own 41.2 percent of Red Rock equity. The company is the parent of Station Casinos and owns 21 gaming properties. The regional gaming operator acquired the Palms in 2016 for $312.5 million, and have since poured another $679 million into the venue, bringing the investment to nearly $1 billion.
Since June 1, 2016, Red Rock shares are flat, while rivals Boyd Gaming (NYSE:BYD) and Penn National Gaming (NASDAQ:PENN) are higher by 54 percent and 52.51 percent, respectively.
As Wieczynski points out, investors considering Red Rock stock may need to be patient while waiting for the Palms and Palace Station efforts to pay off.
“We would expect shares to come under pressure tomorrow, as management noted the Palms ramp will continue to take some time, while the Palace Station ramp has been slower than expected as its expense structure needs some fine-tuning,” said the Stifel analyst.
Focusing On Free Cash Flow
Free cash flow (FCF) is an often-used valuation metric with gaming equities, and it could be one that lures some investors to Red Rock, as the company is targeting an FCF yield of 11 percent. But that still trails some rivals. For example, Boyd Gaming could have an FCF yield of 13.5 percent this year and 14.5 percent in 2020.
“11% is a compelling FCF yield for most investors, but with other regional gaming companies trading at 15%-25% FCF yields with less noise around property ramp timings, we believe investors could start to turn their attention elsewhere,” said Wieczynski.
The Stifel analyst has a “hold” rating and a $23 price target on Red Rock shares. That forecast is slightly below the Wall Street consensus of $24.10.