Red Rock Resorts, Inc.

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 3/5

Red Rock Resorts, Inc. is a holding company engaged in gaming, entertainment, and management services primarily focused on the Las Vegas locals market through a chain of properties.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Red Rock Resorts, Inc., operating primarily through its Station Casinos LLC subsidiary, focuses on the Las Vegas locals market, targeting residents rather than tourists. Their properties include casinos, hotels, restaurants, entertainment facilities, and various other amenities. The revenue generation is primarily from gaming, along with food and beverage, hotel operations and other non-gaming activities.

Revenue Distribution:

  • Las Vegas operations: This segment accounts for the bulk of RRR’s revenue, primarily from gaming, food, beverage, hotel room rentals, and other services.
  • Native American Management: RRR also manages and is involved in the development of tribal casino properties for Native American communities including the Graton Resort & Casino in California and the upcoming North Fork Project. Revenues from these activities are from the associated management contracts and are generally smaller than the Nevada operations.
  • Regional Gaming: RRR operates in the regional gaming sector, which includes local gaming markets such as Las Vegas. The key factor in success is being able to identify the local populations trends and cater towards the local consumers.
  • Las Vegas Market Recovery: The Las Vegas market has been recovering after the COVID-19 pandemic related shock. The management believes this recovery is a long-term trend.
  • Macroeconomic Sensitivity: The gaming industry, in general, is sensitive to fluctuations in consumer spending and macroeconomic conditions, such as inflation and employment. In 2022 and 2023, RRR has been seeing that its consumers are still spending.
  • Digital Transformation: The gaming industry is increasingly adopting technology, particularly digital platforms, including online gaming and sports wagering platforms.

Margins

  • Operating margin: RRR’s operating margin has been improving but it is still subject to fluctuations based on economic conditions, demand, and promotional activities. In the recent reporting periods the Las Vegas operations show solid EBITDAR margin improvements and good demand.
  • EBITDAR: EBITDA less pre-opening and acquisition costs, adjusted EBITDA, and adjusted EBITDA margin, all for the Las Vegas and Native American Management segments, are a key performance metrics for RRR.

Competitive Landscape:

  • The gaming industry, especially in Las Vegas, is very competitive with other large gaming companies and other casinos seeking to attract the same local customers.
  • RRR competes with many large companies who have significant scale and more resources. However, because of their focus on the locals market they tend to be less dependent on fluctuations on the macro-tourism sector.

What Makes RRR Different

  • Local Focus: While other casinos might focus primarily on the tourists and conventions of Las Vegas, RRR focuses on a smaller local demographic of Las Vegas. This gives the company the opportunity to tailor it operations specifically to the consumers in this demographic.
  • Strategic Expansion: RRR also partners with Native American Tribes to build and manage casinos outside of Las Vegas, which adds another revenue stream and strategic diversification to the company’s portfolio.

Financials Deep Dive

This section is primarily based on the latest 10-Q and 10-K reports of RRR as of Q3 2023 which covers Q1,Q2, and Q3 and full financial year 2022.

  • Revenue Growth: The company has shown a steady revenue growth in recent years, as well as during the present year, driven primarily from its operations in Las Vegas and some newer expansions.
  • EBITDA and Margins: RRR has had fluctuations in EBITDA and margins, which are directly related to the macroeconomic factors and consumer spending. Though, they have been showing consistent improvement in the recent reporting periods. This should be monitored by investors, to see if these levels can be maintained.
  • Debt and Leverage: RRR has high levels of debt, and while it has been reducing debt, and managing to maintain a good enough coverage on its interest payments, the company still has a considerable amount of debt.
  • Balance Sheet: Although RRR has a reasonable amount of liquidity, the equity values are low due to consistent operating losses in the past and significant long-term debt on its balance sheet.
  • Cash Flow: The company is generating good cash from its operations. But this is being largely used in debt repayments and capital expenditures. This is not a bad thing as the company is focused on improving its balance sheet and operations for the long run, but has little to show for in terms of direct profits and distribution for investors.

Moat Analysis

Moat rating: 2/5

RRR has some barriers that would prevent competition.

  • Location based advantages: RRR focuses on local markets around its areas, and as such can be considered to have a location based moat where they already have the existing infrastructure and customer loyalty in a particular region.
  • Regulatory Barriers: RRR has obtained some regulatory approval to conduct operations in its properties and especially on Native American Lands. These regulatory moats are hard to obtain.
  • Brand Strength: Some of the areas like its primary markets of Las Vegas, RRR enjoys some brand strength through long operating history and a positive image within the local community.

However, these are somewhat weak moats and not incredibly powerful at preventing competition:

  • Location based advantages are often limited in scope since local markets may be small and not that lucrative for further expansion.
  • Regulatory barriers can be circumvented by companies trying to get similar approvals in the future. They also can be potentially overturned.
  • Brand strength can diminish over time with changes in trends, new competitors, and bad press.

Legitimate Risks and Business Resilience

  • Debt Burden: High levels of debt make the company more vulnerable to changes in interest rates or if business slows down. In such situations, RRR may struggle in repayments, leading to potential financial stress.
  • Economic Sensitivity: RRR is sensitive to the changes in consumer spending. If economic conditions like unemployment or increased inflation worsen, then the business will likely experience decline in revenues.
  • Regulatory Changes: A change in gaming regulations can greatly impact the company’s profits and growth. Any new tax burdens, changing requirements for licensure, or changes in state or federal gambling policies can affect the company’s operations.
  • Competition: Las Vegas is a very competitive market. RRR has to constantly be innovating and improving their services to maintain market share and profitability. New rivals and expansions from existing competitors can impact the firm’s profitability negatively.
  • Construction Delays and Cost Overruns: New properties and expansion projects that RRR takes part in, can encounter unexpected delays or unexpected cost overruns that can negatively affect profitability. This has been seen in the recent past with their operations in North Las Vegas.

RRR has shown some resilience, and is implementing strategies to improve its operations. However, the firm will need to be watchful, adaptive, and flexible to handle potential future issues.

Understandability

Understandability: 2/5 RRR is not a very complicated business to understand. The idea of the company is simple, they are casinos and entertainment centers for local communities. However, they do also have operations in native American tribal lands, and also have more complex financials due to the nature of the gaming and financial markets. As such the average investor may find it hard to properly do a deep analysis, so this is a complex company to evaluate.

Balance Sheet Health

Balance Sheet Health: 3/5 RRR’s balance sheet shows a mixture of positive and negative elements. The company has adequate liquidity to maintain their operations in the short-term, but their long-term debt is very high. As such, while the company is not close to bankruptcy, RRR does not have a “very healthy balance sheet”. The company needs to focus more on repayments and maintaining proper capital management for future stability.

Conclusion

Red Rock Resorts, Inc. is a company that operates in a highly competitive gaming market, but its focus on the local market and expansion into native American territories gives it a distinct approach. Their management has shown adaptability and has implemented strategies to improve long-term profitability, however the firm is still susceptible to the nature of the industry’s economic risks. And they need to continue improving its operations and also reducing their debts.