Posted on: September 19, 2024, 06:05h.
Last updated on: September 19, 2024, 06:05h.
On Wednesday, the Federal Reserve lowered interest rates by half a percent — the central bank’s first rate cut in four years — sparking hope of a prolonged rally for capital-intensive casino operators, including Red Rock Resorts (NASDAQ: RRR).
At least one analyst sees the Green Valley Ranch operator as one of the gaming companies most positively levered to monetary easing by the Fed. In a new report to clients, Deutsche Bank analyst Carlo Santarelli highlighted Red Rock as one of the prime lower rate beneficiaries in his coverage universe, though he acknowledged the stock could face some “overhang” attributable to uncertainty surrounding the upcoming presidential election.
Santarelli noted lower interest rates could spur faster development of Red Rock’s planned casino hotel in the Inspirada community in Henderson, Nevada. Though not mentioned directly by the analyst, it’s possible that lower borrowing costs could assist Red Rock in expediting expansion plans at the Durango Casino & Resort in Southwest Las Vegas — the operator’s newest gaming venue.
Durango expansion is expected to cost $120 million and previously announced enhancements for Green Valley Ranch could result in 2025 spending $75 million, confirming Red Rock is indeed correlated to the Fed’s interest rate policy.
Why Lower Rates Matter to Red Rock
Lower interest rates are relevant to the Red Rock investment thesis for other reasons. All of the operator’s existing venues are in Las Vegas and lower borrowing costs could stoke renewed vibrancy in the local housing market while potentially providing some relief to consumers.
There’s optimism around rate cuts and the positive tailwind it could have on housing and continued growth on the geographic periphery of the locals market,” wrote Santarelli.
Key demographics in the Las Vegas locals segment include employees of rival gaming companies and construction workers, further underscoring Red Rock’s potential benefits from lower interest rates as well as the operator’s exposure to promotional trends in the market.
“The locals promotional environment remains active, though unchanged on a sequential basis,” added Santarelli. “Valuation remains attractive, with RRR offering about a 10% free cash flow yield on the core operations and the development pipeline is unparalleled within the gaming space.”
Tribal Casino Could Add to Red Rock Investment Case
Investors — accurately so — have long viewed Red Rock as a Las Vegas play. As a result, the stock currently isn’t getting much, if any, credit for the operator’s management agreement for the North Fork Mono Casino & Resort in Madera, Calif.
Construction on that tribal casino recently started with a targeted opening date of sometime in 2026. Santarelli said that when that project stabilizes, Red Rock could generate $40 million to $50 million in yearly management fees, which would be equivalent to $1 to $2 in added value to the stock price.
“We expect Red Rock to begin the construction-financing process in the coming weeks, with financing potentially secured in the November time frame,” Santarelli said. “Red Rock has extended about $60 million to the tribe over the years and this amount will likely increase in the coming months. At present, given accrued interest, Red Rock is owed about $120 million, which could be returned upon the receipt of construction financing.”
