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Stock Analysis & Ideas

Red Rock Resorts Is Gaining Some Serious Momentum

Red Rock Resorts (RRR) owns an indirect equity stake in and manages Station Casinos LLC. Station Casinos holds the most influential portfolio of gaming and entertainment offerings in Nevada, United States. The firm’s properties include restaurants, entertainment venues, movie theaters, convention spaces, and traditional gambling facilities. I am bullish on the stock.

Red Hot Momentum

Red Rock Resorts stock is trading above its 50-, 100-, and 200-day moving averages, suggesting that it’s formed somewhat of a hot streak of late. The momentum ignited approximately a year ago when pandemic lockdowns started easing and has sustained itself into 2022, as the firm has defeated its earnings estimates in three consecutive quarters.

At the start of the month, Red Rock released its fourth-quarter earnings report and managed to beat its revenue and EPS estimates by $13.31 million and $1.14, respectively.

The firm’s latest earnings beat is a sign of consumer strength and, once again, re-openings. Most U.S. states have dropped their COVID-19 mandates while consumer spending remains robust.

This year is likely to be subject to cherry-picking for investors, where stocks that struggled during the previous year will likely be the ones dominating the market this year as economic policies take another radical shift.

Balance Sheet Strength and Growth Prospects

Many investors may worry about the company’s 4.47x leverage ratio, but we really need to consider its current ratio. The company has a current ratio of 3.74x, which is excellent, and means that its current assets cover its current liabilities better than required by creditors (generally 1.5 to 3.0).

In addition, Red Rock managed to build up its working capital by 1900% during the past 12-months, allowing it to either reinvest in its business or pay down debt.

Regardless of which option is chosen to follow, the outcome will be an increase in investors’ residual and subsequently the stock’s intrinsic value.

Valuation

Red Rock Resorts stock is trading at a significant discount. The stock’s non-GAAP price/earnings ratio is trading below its five-year average by 44.4%, meaning that the company’s earnings aren’t quite priced in by the market just yet.

Furthermore, the stock’s price/cash-flow ratio is also trading at a five-year discount of 21%. It’s helpful to observe how a growth company’s cash flows stack up relative to its stock price as the ratio is less susceptible to earnings manipulation and factors out extreme volatility.

Wall Street’s Take

Turning to Wall Street, Red Rock Resorts has a Moderate Buy consensus rating, based on three Buys, two Holds, and one Sell assigned in the past three months.

The average Red Rock Resorts price target of $57.40 implies 13.4% upside potential.

Concluding Thoughts

Red Rock Resorts stock has been in blistering form as momentum, and an array of macroeconomic factors caused a series of earnings beats. The stock’s momentum may well continue for the foreseeable future as consumer spending remains solid and re-openings remain on the cards. Additionally, the market has yet to price in the stock’s potential as indicated by its valuation metrics.

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