Weak Red Rock performs warrants caution: analysts

Weak Red Rock performs warrants caution: analysts

Red Rock Resorts, the company behind Station Casinos and the Palms, is feeling more pressure than other casino operators. This is reflected in its stock, which has only risen 6% this year, much lower than the rest of the pack. Analysts believe that investors are in a mode of wait-and-see, hoping to see some type of cost-cutting efforts on the part of the business.

Weak Red Rock performs warrants caution: analystsRed Rock is owned by the Fertitta brothers, Frank and Lorenzo. Frank, who serves as CEO, and his brother own around 41.2% of the company after a recent purchase of another 2.24 million in shares this past August. That purchase hasn’t shown any real reward, as the company’s stock has remained virtually unchanged since the beginning of June 2016. Compared to others, however, the horizontal picture of the price speaks volumes, given that Boyd Gaming is up by more than 54% and Penn National Gaming is up by 52.51% over the same period.

The Fertittas purchased the Palms for $312.5 million in 2016 and then sunk another $679 million into the property. The $1-billion investment hasn’t paid off the way they expected, and they are now looking for ways to cut costs at the venue. Part of this includes shutting down the Kaos nightclub, which will force the company to take $28 million in charges over the next two quarters, according to a recent announcement by Red Rock.

At the same time, Red Rock hopes to see a bigger return at its Palace Station casino, as well. Lackluster performance at the venue, as well as the weak return at the Palms, is most likely the reason investors aren’t attracted to the company now, according to Stifel analyst Steven Wieczynski. He said recently about Red Rock, “While [Red Rock’s] 3Q19 results showed a slight miss relative to consensus, we believe investor expectations were muted around the quarter, given the continued unknown around the Palms/Palace Station ramp.”

Wieczynski, who gives the company a “Hold” rating with a price target of $23 – a little below the $24.10 most Wall Street analysts have forecast – adds, “We would expect shares to come under pressure tomorrow, as management noted the Palms ramp will continue to take some time, while the Palace Station ramp has been slower than expected as its expense structure needs some fine-tuning.”

The inability to turn a stronger profit isn’t the only thing hurting the casino operator. It has been embroiled in battles with employees at many of its venues who have voted to unionize. However, the Fertitta brothers refuse to recognize the efforts and this has led to regulatory pressure, as well as front-line support from politicians. The company also faces a complaint, in relation to those unionization efforts, that it may have colluded with politicians in violation of ethics laws on Capitol Hill.