Station Casinos executives traveled to New York CIty recently for two days of meetings with Deutsche Bank analysts. Lead boffin Carlo Santarelli concluded afterward that Station was “being a relative winner” but that a “choppy” third quarter was complicating matters. He nonetheless maintained a “Buy” rating on Station stock and a $65 per share price target. Shares of Station (which trades as Red Rock Resorts) were $54.22 per share at the time.
After meeting with Station brass, Santarelli articulated five core convictions. First, that the Las Vegas local-oriented market is stable, with outperformance at higher-end properties boding well for Station. Secondly, promotional wars in Las Vegas remained active. Third, Station’s core operations were throwing off 10% free cash flow, making for an attractive valuation on RRR stock. Fourth, “the development pipeline is unparalleled within the gaming space.” Finally, Station’s North Fork Rancheria project in California, which recently broke ground, was deemed under-appreciated.
Turning back to Las Vegas, Santarelli observed that seasonality among locals was back. Same-store trends, he said, were flat, despite a 13 percent surge in July revenues, driven by new Durango Resort. Station’s database was deemed stable, fattened by the addition of 45,000 Durango-related signups. Although promotional warfare continued, Station was said not to be materially impacted and a pacifist besides, with single-property and privately held casino operators doing most of the shooting.
Following the Federal Reserve’s interest-rate cuts, Station execs expressed optimism, particularly around “the positive tailwind that could have on housing and existing home sales.” Also, the periphery of what constituted the Las Vegas locals market was seen to be expanding. Even so, Santarelli cautioned that the third quarter had been affected by a relative dearth in stimulus dollars and exceptionally hot weather. Other distractions were provided by the summer Olympic Games and the U.S. presidential election, although Deutsche Bank did not elaborate.
Compared to the post-Covid era, fourth-quarter projections were seen as somewhat of a challenge. “In addition, we expect the overhang of the November election to continue to weigh on locals market trends into the 4Q24, while we also want to remain cognizant of Strip softness in the 4Q24, and its potential impact on the locals market,” Santarelli wrote. He was of the opinion that an economic downturn is coming but found Station better positioned than most to weather it. Despite recent increases in labor costs and softness in casino revenues, “we see downside as far more limited than historical comparisons may indicate.”
Compared to prior economic declines, Station management opined, they are in a more resilient and diverse Sin City economy. They have also tweaked their development plan a bit, delaying Skye Canyon while moving up their 128-acre Cactus Lane project (immediately south of Michael Gaughan’s South Point). Santarelli thought external causes motivated this switch: “We believe the primary drivers of the pecking order relate to population growth in the local zones around the development, as well as, to a lesser extent, the experience from Durango related to the cannibalization circles.”
The Cactus Lane development even, according to the analyst, leapfrogged Phase II of Durango Resort. The latter will add 2,000 covered parking spaces, 230 more slot machines and 25,000 more square feet of casino. After Durango, Inspirada took third position in the construction queue. Although aimed at high-income Anthem residents, it will be but only 60% the size of Durango. Explained Santarelli, “While we view Cactus and Durango Phase II as a toss up at this stage, with respect to what is next, we believe Cactus has moved ahead of Inspirada in terms of managements thinking.”
Several capex upgrades are also on the table. First up are ongoing Sunset Station renovations, which Deutsche Bank said were still disrupting business at that resort. Next is a 495-room overhaul of Green Valley Ranch. This will cost a minimum of $75 million. Lastly, North Fork is slated for an opening before July of 2026. “We believe the management fee stream will provide a nice EBITDA growth lever for [Station], as the early stage growth of Durango wanes in 2026,” opined Santarelli.
The finished tribal property will have 2,500 slots and at least 40 table games. Station has lent the North Fork Rancheria $120 million (including $60 million in interest), with more expected. Once the casino is on its feet, Station will receive a 30% management fee and a 4% ‘development fee,’ which in tandem should represent 40% of property cash flow, wrote Santarelli. “Given the demographics and similar tribal management agreement fees, we believe [Station] will generate $40-50 mm, per year, upon stabilization,” he concluded. “Accordingly, we believe the present equity value related to the future fees equates to $1-2 per share, which is incorporated in our current $65 price target.“