On Wednesday, the Federal Reserve made the unexpected move of lowering interest rates by half a percent, marking the central bank’s first rate cut in four years. This decision ignited optimism among investors, particularly in capital-intensive sectors like casino operations. One of the immediate beneficiaries appears to be Red Rock Resorts (NASDAQ: RRR).
Red Rock Casino-Resort has caught the eye of at least one analyst who believes the company could significantly benefit from the Fed’s monetary easing. Deutsche Bank analyst Carlo Santarelli pointed out Red Rock, the operator of Green Valley Ranch, as a prime candidate to gain from lower interest rates. However, he did caution that the stock might encounter some “overhang” from uncertainties related to the upcoming presidential election.
Santarelli emphasized that reduced interest rates could accelerate the development of Red Rock’s planned casino hotel in Henderson, Nevada’s Inspirada community. Although not explicitly mentioned by the analyst, it’s plausible that lower borrowing costs could also facilitate the company’s expansion plans at Durango Casino & Resort in Southwest Las Vegas, their newest venture in the gaming world.
The projected cost for the Durango expansion stands at $120 million. Additionally, previously announced upgrades for Green Valley Ranch could push spending in 2025 to $75 million. These figures strongly indicate Red Rock’s financial strategies are closely tied to the Fed’s interest rate policies.
Lower interest rates hold particular significance for Red Rock’s investment strategy beyond just development costs. All their existing venues are located in Las Vegas, a market that could see renewed energy in the local housing sector due to cheaper borrowing costs. This might also provide financial relief to consumers, a boon for the company.
“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,” Santarelli noted in his report.
The key demographics for Las Vegas locals include employees of competing gaming companies and construction workers, sectors that tend to be highly sensitive to interest rate changes. This adds another layer of potential benefits for Red Rock, which could also see gains from ongoing promotional trends in the market.
“The locals promotional environment remains active, though unchanged on a sequential basis,” Santarelli added. “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.”
Investors have traditionally viewed Red Rock as a primary Las Vegas play. Consequently, the stock hasn’t garnered much attention for its management agreement with the North Fork Mono Casino & Resort in Madera, California. However, this could change.
Construction on the tribal casino has commenced, targeting a 2026 opening. Santarelli pointed out that once stabilized, this project could generate $40 million to $50 million annually in management fees for Red Rock, translating to approximately $1 to $2 in stock price value.
“We expect Red Rock to begin the construction-financing process in the coming weeks, with financing potentially secured in the November time frame,” Santarelli commented. “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.”
Overall, the Federal Reserve’s rate cut brings a wave of optimism for Red Rock Resorts, potentially ushering in an era of robust growth and renewed investor interest.
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