Red Rock Resorts, Inc. (RRR, Financial) is the leading owner/operator of “locals” casinos in the Las Vegas market, with nine major casinos and 10 smaller neighborhood properties. The company, which used to be known as Station Casinos, recently returned to the public markets after going private in 2007, and we reinvested in its IPO.
We view the Las Vegas locals market – casinos that primarily cater to the local population, not visitors – as a highly attractive gaming segment, because of low tax rates and regulatory stability, the high propensity of locals to gamble, and new supply constraints. Station Casinos pioneered the industry and is its proven leader with close to 50% market share. We believe they have the most compelling and diverse product. The company has garnered powerful brand equity from its long standing commitment to customer service and attractive loyalty programs.
We see many avenues of growth for Red Rock Resorts. We expect them to show nice same-store revenue and cash flow growth, as the company and the Las Vegas economy continues to recover from the last recession and as the market grows from the strong pipeline of major new casinos (catering to a different audience) to be built over the upcoming years. We believe Red Rock Resorts has expansion opportunities with both its gaming and non-gaming assets, that we believe will be pursued and provide strong returns, although we cannot guarantee that they will. The company recently acquired the Palm, an underperforming locals casino that we think they will turn around. They are building two casinos with Native American tribes that they will manage for the next seven years. They also own 400 acres in seven parcels that are gaming entitled, and we believe they will shortly start constructing two new casinos in Las Vegas and Reno.
We believe the company is attractively valued today at around 9.5 times this year’s Las Vegas EBITDA. That cash flow should grow by double digits organically, and the balance sheet should de-lever, even after spending on the expansion and new developments mentioned above. We think we can make solid returns as shareholders as the business grows and if the multiple expands, as we suspect.
From Baron Funds' Small Cap Fund second quarter 2016 shareholder letter.
