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Red Rock Resorts (RRR) Banks on Development Projects, Costs High

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Red Rock Resorts, Inc. RRR is likely to benefit from development projects, digital efforts and Las Vegas operations. Also, emphasis on business optimization and cost-reduction measures bode well. In the past year, the stock has declined 4.8% compared with the industry’s decline of 51.4%. However, COVID-related carry costs and inflationary pressures are a concern.

Let us discuss the factors that highlight why investors should retain the stock for the time being.

Factors Driving Growth

Red Rock Resorts continues to focus on development projects to drive growth. Following a favorable decision from the California Supreme Court (in August 2020), Red Rock Resorts focused more on the North Fork development project. The cost of project completion, excluding any financing costs, is expected in the range of $350-$400 million. The company stated that the project is currently in the planning and budgeting stage. RRR is concentrating on the Durango development project. Located off the 215 Expressway and Durango Drive in Southwest Las Vegas Valley, the project is likely to cover 71 acres in the area. The facility will comprise 73,000 square feet of casino space, 2,000 slots and 46 table games, a state-of-the-art sportsbook, 200 hotel rooms and four full-service food and beverage outlets. The company is optimistic about this development pipeline owing to the location. The fact that there are no unrestricted gaming competitors (within a 5-mile radius of the project site) is likely to add to the positives. In January 2022, the company received a permit to begin the project’s construction. The estimated duration for construction is anticipated to be between 18 months and 24 months.

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The company has been witnessing favorable customer trends following the reopening of most of its properties (in June 2020). Attributes such as consistent visitation from guests, increased spending per visit, more time spent on gaming devices and a return of core customers have added to the positives. The lifting of the mass mandates across Nevada added to the upside. Going forward, the company intends to focus on offering new amenities to its guests (such as the VIP high limit table room), business optimization and cost reduction measures to drive growth in the upcoming periods.

The company continues to make substantial progress with respect to cashless gaming. During fourth-quarter 2021, the company completed field trials with IGT (at Red Rock and Green Valley branch properties) for cashless payments on the slot floor. During first-quarter 2022, the company initiated the product’s rollout at its Las Vegas properties, excluding Wildfire Taverns and Sunset Station. Given the emphasis on a single mobile digital wallet access for playing and paying purposes, the company intends to implement the product at the remaining properties over the next two quarters.

The company’s Las Vegas operations have been a key growth driver in the past few quarters, which is likely to continue in the coming quarters. The company is bullish on the long-term view owing to favorable supply-demand dynamic, positive long-term trends in population growth and a stable regulatory environment. Attributes like best-in-class assets and locations, unparallel distribution and scale and a solid organic development pipeline (of six owned gaming and title development sites) are likely to drive the company’s performance in the upcoming periods.

Concerns

The Gaming industry is currently grappling with the coronavirus pandemic and Red Rock Resorts isn’t immune to the trend. During the first quarter, the company reported a sequential decline in visitations due to the Omicron cases. Also, it announced the closure of Texas Station, Fiesta Henderson and Fiesta Rancho properties to comply with a statewide order mandating the closure of Nevada casinos due to the crisis. During the quarter, carry costs associated with its closed properties came in at approximately $2.1 million. Although restrictions on operations to implement social distancing and other health and safety protocols were lifted, chances of re-implementation cannot be ruled out. The unprecedented nature of the crisis is likely to affect the company’s results in the future.

The rise in labor and commodity cost continues to hurt the company. During the first quarter, the company witnessed price inflation in ordinary goods and services such as food, supplies, energy and construction costs. Also, it witnessed higher costs on account of labor and supply chain shortages. Selling, general and administrative expenses during the quarter came in at $86.3 million compared with $78.9 million reported in the prior-year quarter. The company intends to focus on cost-control measures and price adjustments to counter the same.

Zacks Rank and Stocks to Consider

Currently, Red Rock Resorts’ carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 (Strong Buy) Rank stocks here.

Some better-ranked stocks in the Consumer Discretionary sector are Civeo Corporation CVEO, Bluegreen Vacations Holding Corporation BVH and Funko, Inc. FNKO.

Civeo sports a Zacks Rank #1 (Strong Buy) at present. The company has a trailing four-quarter earnings surprise of 1,565.1%, on average. Shares of the company have increased 53.6% in the past year.

The Zacks Consensus Estimate for CVEO’s 2022 sales and earnings per share (EPS) suggests growth of 12.5% and 1,450%, respectively, from the year-ago period’s levels.

Bluegreen Vacations carries a Zacks Rank #2 (Buy). BVH has a trailing four-quarter earnings surprise of 85.9%, on average. The stock has increased 30.8% in the past year.

The Zacks Consensus Estimate for BVH’s current financial year sales and EPS indicates growth of 11.5% and 28.7%, respectively, from the year-ago period’s reported levels.

Funko carries a Zacks Rank #2. FNKO has a trailing four-quarter earnings surprise of 78.7%, on average. Shares of the company have declined 18.7% in the past year.

The Zacks Consensus Estimate for Funko’s current financial year sales and EPS suggests growth of 26.8% and 28.9%, respectively, from the year-ago period’s reported levels.


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