Red Rock Resorts (NASDAQ:RRR) isn’t planning to reopen Palms Las Vegas or its three other shuttered gaming sooner-than-expected as the company waits out Sin City’s slow coronavirus recovery while emphasizing free cash flow generation at venues that are operational.
Executives delivered the comments regarding the closed properties on the company’s fourth-quarter earnings conference call with analysts yesterday. Buoyed by stout earnings earnings before interest, taxes, depreciation and amortization (EBITDA) and rising margins, the Station Casinos operator delivered better-than-expected results, sending its shares to a 52-week high today.
Last June, Red Rock filed documents with the Nevada Gaming Control Board (NGCB) to keep Fiesta Henderson, Fiesta Rancho, Palms and Texas Station closed through June 30, 2021.
I think the Palms is very oriented towards the tourist market visitation to Las Vegas, getting that business to return to normal,” said Red Rock CEO Frank Fertitta in response to an analyst’s question. “And in the local properties we’re going to continue to look at how the older demographic response given the vaccine and get business back to normal before we do anything unless we’re certain that we can be cash flow positive.”
Although Red Rock’s fourth-quarter net revenue and adjusted EBITDA slumped on a year-over-year basis, due in large part to the aforementioned quartet of casinos being closed, adjusted EBITDA and margins impressed. The gaming company said adjusted EBITDA for the last three months of 2020 surged 16 percent while adjusted EBITDA margin increased 832 basis points.
Palms, Others Take Back Seat to Cash Flow
In the wake of the COVID-19 pandemic, many gaming operators are emphasizing cash flow, leaner operations and stronger balance sheets. Red Rock is part of that club.
During the October through December period, the gaming company converted 76 percent of adjusted EBITDA to free cash flow — the equivalent of $114.7 million, or 98 cents a share. From June through the end of 2020, Red Rock $259.1 million of free cash “with virtually every dollar going to pay down debt and improve our financial flexibility, as we look to emerge from the pandemic,” said CFO Stephen Cootey.
That’s a sizable amount of free cash relative to the company’s market capitalization of $3.10 billion and indicates the operator can afford to be pragmatic in reopening the aforementioned venues.
Another tidbit from the conference call: Unlike prior calls, there’s was no direct mention from analysts of the Palms perhaps being sold. Fertitta previously rebuffed those rumors. On Tuesday, Cootey said “everything is on the table and it’s all value related”, but that comment didn’t include mention of a specific venue.
Other Favorable Traits
In a note to clients today, Macquarie gaming analyst Chad Beynon reminds investors that Red Rock owns all of its real estate and another 475 gaming-entitled acres in Nevada — holdings that are worth $3 a share and could be monetized if the company needs cash.
Citing Las Vegas’s strong population growth, steady housing market and supply restriction, the analyst said the locals gaming market — Red Rock’s core clientele — is attractive from an investment perspective.
Beynon rates Red Rock “outperform” with a price target of $33, which is up from $30 and implies upside of more than 10 percent from current levels.
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