Below is a complimentary research note from our Gaming, Lodging, and Leisure (GLL) analysts Todd Jordan and Sean Jenkins. If you are an institutional investor interested in accessing our research email firstname.lastname@example.org
We are removing Red Rock Resorts (RRR) from the Hedgeye Best Idea Short List. The stock has plummeted ~33% since we added as a short on June 3rd versus a positive return of 2% in the S&P over the same period.
We’ve mostly been negative on the entire gaming, lodging, and leisure space with PENN as the only domestic casino stock on our Long Bias List. By contrast, PENN only fell 11% over the same time period.
Pulling RRR of the Short List is not due to price action alone, although the valuation is now much more reasonable and appropriate in our opinion. In addition to the precipitous decline in the stock we note that the near term negative catalysts have played out.
It’s now well known that business closures and employee layoffs in the Las Vegas area are near the top in the nation. The macro picture won’t be pretty there and our prior statistical work suggests that the LV locals operators such as RRR are heavily reliant on a strong macro.
We haven’t changed our opinion that the LV locals market will be one of the worst performing casino markets in the country but at least investors appear to have come around to our view.
Also negatively impacting the stock was the mask catalyst – accelerating Covid cases combined with a cautious Governor tied to the unions did indeed result in mandated masks for all customers throughout the hotel casinos.
The casino companies will begin to report Q2 earnings in late July and we expect a lot of volatility and generally soft top line numbers.
However, we do expect a positive margin theme to emerge from the regional casino operators and while RRR likely will not generate the level of margin improvement of casino operators outside of Las Vegas – such as PENN – a rising tide could lift all boats. For now, we’ll move to the sidelines on RRR.
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