Red Rock Resorts (NASDAQ: RRR) is experiencing structural tailwinds that bode well for the casino operator’s margin durability, according to an analyst who argues investors aren’t giving the company enough credit. Deutsche Bank analyst Carlo Santarelli, in a note to clients, pointed out that Red Rock’s property-level margin expansion is more sustainable than many market participants realize, citing multiple supporting factors.
Santarelli highlighted three primary drivers for this sustainability: the current portfolio versus the 2019 portfolio, gaming promotions, and the food and beverage segment. Red Rock’s portfolio has transformed significantly since the coronavirus pandemic. The company permanently closed Fiesta Henderson, Fiesta Rancho, and Texas Station, and sold the Palms at a loss. On the flip side, Red Rock opened the Durango Casino & Resort in Southwest Las Vegas last December, and the new venue is performing impressively.
Following the pandemic, Red Rock and other casino operators saw immediate boosts to margins by trimming less profitable non-gaming offerings such as lower-end dining and entertainment. However, some analysts and investors have questioned the longevity of this margin expansion, speculating that such lean operations could only be sustained temporarily as normalcy returns to major gaming markets. Santarelli, however, believes these concerns are misplaced in Red Rock’s case.
He argues that while the main skepticism around Red Rock stems from its valuation, the apprehension regarding its margin outperformance compared to 2019 is also prevalent. According to Santarelli, the market is not fully appreciating the structural changes that have driven much of the margin improvements, which are not tied to operating performance or the broader competitive environment.
Santarelli also contends that Red Rock is likely to continue expanding its margins even if revenue growth faces challenges. Year-to-date, Red Rock’s shares have risen by 9.43%, outpacing broader small-cap benchmarks like the Russell 2000 and the S&P Small Cap 600 indexes, which have increased by 6.7% and 5%, respectively.
This impressive performance has come despite concerns that the new Durango Casino might be diverting business from Red Rock’s other venues, particularly its namesake casino hotel in Summerlin, Nevada. Company executives acknowledge this issue but expect it to resolve itself over time. Santarelli has given the stock a “buy” rating with a $65 price target, indicating an upside potential of 13.3% from the current closing price.
 sees sustainable margin growth driven by strategic changes, says Deutsche Bank’s Carlo Santarelli, who rates the stock a "buy."){kind=link}