On the heels of a December visit to Durango Resort in Las Vegas, Deutsche Bank analyst Carlo Santarelli boosted his price target on Station Casinos (a.k.a. Red Rock Resorts) stock, raising it from $54 per share to $62. The stock was trading at $53.79 a share at the time.
Not only did Santarelli find trends at Station’s newest casino to be solid, he was reassured by ongoing strength in the Las Vegas locals market. He opined that the latter was even stronger than Wall Street’s consensus view (up 3.5 percent since 2022) and that it would drive better-than-expected cash-flow results for Station this year. Wall Street forecasts “appear achievable, if not beatable,” the analyst wrote, should the market continue to hold firm.
Santarelli was of the mind that Station’s new and upcoming projects constitute “the strongest organic growth pipeline in gaming.” He added that of overall drive-in casino markets, Las Vegas remains particularly desirable. He also liked Station’s ownership of its real estate, at a time when much competing casino inventory is in the hands of landlords.
The report, issued today, observed that Station’s overall net revenue from Las Vegans fell 1.8 percent in the second quarter of last year and another point in the third. “Given the strength in the market in October and November, we believe same-store trends were stronger in the 4Q23 and we expect December to benefit modestly from Durango,” which opened Dec. 5.
Therefore, in-house cost increases, which Santarelli believed drove the negative results in the second and third quarters, would be mitigated. Property insurance, utility prices, and labor costs were all up year over year.
“Additionally, we believe the strong opening at Durango will have a more limited than previously anticipated impact on locals-segment property-level margins,” Santarelli penned. He cited a previous statement by a Station executive that the company expected Durango Resort to be profitable right out of the gate.
While Santarelli urged investors to keep an eye on cannibalization of other Station properties, he wrote that promotional wars haven’t materialized significantly. He called food-and-beverage returns a particular bright spot, adding that managerial planning and customer demand would minimize the effects of Durango on its in-house competition.
Santarelli was additionally bullish on the prospects for Station’s newly approved collaboration with the North Fork Rancheria of Mono Indians. Although the project hasn’t moved off the drawing board yet, he expects completion late next year.
He also cited a “hidden asset” for Station in the $60 million it fronted the North Fork Rancheria (plus interest), worth $1 per share in equity once repaid. Another dollar of equity value would be derived from the casino itself, assuming it opens in 2026.
Turning to Station’s vast 563-acre land bank, Santarelli predicted that 74 acres would soon be off the market, as a sale of Texas Station and Fiesta Rancho was “pending.” Another 122 acres are being shopped, as they lack a gaming entitlement. The remaining 441 acres, all gaming entitled, have been earmarked for development.
The for-sale land could add another $8 per share to Station’s stock value, Santarelli offered. He wrote, “Given comparable real estate for commercial purposes in the Las Vegas Valley, we believe the broader portfolio is worth ~$1.1 mm per acre, while we value the Wild Wild West land at $3 mm per acre, given Strip adjacent comparables.”
