Consider Red Rock Resorts If You Are A Patient Investor

The pandemic has hit few companies as hard as it has Red Rock Resorts (NASDAQ:RRR), which manages casinos and entertainment properties through Station Casinos LLC. Discretionary spending is down and consumers are staying away from public/crowded places. The impact started to show in the Jan-Mar quarter when the company’s revenue fell nearly 15%. However, Apr-Jun is going to be much worse! The stock is down 55% because of losses that the company could face and a grim outlook. But it could also present a buying opportunity if one gets a good sense of (1) When the demand will bounce back? (2) How well is Red Rock Resorts positioned to ride out the lean demand period? We answer these questions through our interactive dashboard Red Rock Resorts: A Covid Recession can still generate $35 Mil in cash during 2020

We find that the company is fairly well positioned from a cash flow and liquidity perspective. Therefore, it is only a matter of how soon the demand could come back. Considering the worsening situation in some parts of the U.S., we believe that the company could lose 50% of its revenue in 2020 and it might take a year from now to get back to a pre-Covid revenue run rate. 

Demand Recovery

In 2019, Red Rock Resorts saw a small loss of $-2.4 million on a revenue base of $1.9 billion. Despite this, it managed to generate nearly $317 million in free cash from operations. In addition, it spent about $354 million in capital expenditure. However, 2020 could be very different. The company could lose anywhere between 30%-50% of its sales. In fact, we believe that even in 2021, the demand for the company’s offering could only reach 80% of the 2019 level, at best. We consider two scenarios for 2020 (1) Revenue down for full year 30% but Red Rock Resorts cuts its capital expenditure in half (2) Revenue down for full year 50% with 70% capital expenditure cut. The second case may be more likely considering that it had to shut all its Las Vegas properties in March as the pandemic spread.

Cash Flow Under Two Scenarios

In the first scenario, where revenue declines by 30% for the full year, Red Rock Resorts’ net losses could swing to $-136 million, resulting in free cash flow from operations dropping to $184 million. In the second scenario, where revenue declines by 50%, the company could post losses of $-222 million and its free cash flow could drop to $97 million. Thus, both scenarios require careful management of variable expenses and cutting down on capital expenditures to stay cash flow positive. As far as the liquidity position is concerned, it improved significantly during the Jan-Mar period as the company raised more debt. At the end of Mar 2020, the company had nearly $1.1 billion in cash pile which we believe is sufficient to fund any cash burn it might face.

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