Red Rock Resorts (RRR 2.95%) has a unique position in the casino industry as a Vegas-based casino that operates outside of the Strip. With new developments on the horizon and a partnership in online sports betting, the company has a number of growth opportunities ahead.
In this episode of "Beat and Raise," Fool contributors Toby Bordelon and Jason Hall discuss the company's third-quarter earnings report and what's in store.
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Toby Bordelon: We're talking about Red Rock Resorts. Yeah. This is a relatively new company for me. A recent recommendation from one of our services, I think. Red Rock Resorts. Since they are new, we'll just give a quick overview. They operate casinos. Casino operator mainly in the Vegas area. They're not a strip casino operator. They operate in the --.
Jason Hall: They're off-strip. I think it's that way.
Toby Bordelon: They are off-strip in their more neighborhood areas. But they do have some luxury resorts. If you've ever been to Vegas, and you've been to Red Rock Canyon, you've probably passed the actual Red Rock Casino. They've got a flagship resort out there.
Jason Hall: I would say if you haven't, you should. I just want to say that.
Toby Bordelon: You actually should. That gets awesome. You go to Vegas, yeah you do the gambling, yeah you eat a nice steak dinner, get out to Red Rock, do some hiking. You'll see this place on your way. It's cool. It's one of their luxury resorts. But they have several. They have several out there. Different price points. They have another luxury, probably another development on the west side of Vegas. They actually own some property up here in Reno where I am. Under the Reno Convention Center and up at Mount Rose, which is a ski resort where I spend most of my ski days in the winter. I'm looking forward to see what they do with that, I don't know what they're doing with that. That's interesting. But look, revenue was pretty good. This was a pretty good quarter. Revenue went up 17 percent to $414, almost $415 million. Most of that is casino revenue. As you might expect, some of it is rooming, some of it is food. They obviously have cool stuff you would see from a resort-type operator like this. Net income up 64 percent. That's a pretty big disparity between the increase in revenue and the increase in net income. One thing is that depreciation went down last year, but also it's just that you think about a casino operator, you do have some fixed costs that are just hard to deal with. When you're talking about coming out of the pandemic, you would expect your revenue to grow faster. You would expect to get more boost on your operating income as your revenue grows because your expenses aren't going to grow quite as fast.
Jason Hall: Operating leverage? That's what we're talking about.
Toby Bordelon: Yeah, exactly. That's what we're talking about here. Most of their income is from Las Vegas. Like I said, that's where they are. They have a few things elsewhere. They have some management fees for some Native American casinos. Most of it is in the Vegas area. Ninety million in cash, 2.7 billion in debt on the balance sheet. But remember, casino operator resorts are expensive to build. They own all the land. It's really almost a real estate play in some regards. You would expect a lot of debt on the balance sheet. That's what we're seeing here. They do have a partnership they announced with GAN Limited to do some things in the sportsbook, with mobile betting, kiosk, sports betting, sportsbooks. I don't think it's closed yet. They are selling the Palms casino they used to own. They're selling that. I want to say something on margins. They've got some really good margins going on. This was actually hilarious in the conference call. I read through the transcripts. One of the analysts asked some question about, are your margins sustainable? They look high, basically is what they were saying. The CFO threw them some shade a little bit. [laughs] We started out with, all right, this question gets asked every quarter. Let's have a history lesson here. [laughs] Went through how they've consistently had these high margins. He ended with, I love his comment. We expect the margins to be sustainable. I just love that. I just love that he refrained from saying, this is a stupid question.
Jason Hall: He made it a teaching moment.
Toby Bordelon: Yeah, exactly. It made me want to actually listen to these conference calls live when I can because I like this management team. I think they are pretty sharp. The stock is down a little bit. I wouldn't be too concerned about that though. They did really well. If you're looking into the casino market, looking in Vegas, this is interesting because you're not competing head-to-head with those strip casinos.
Jason Hall: Right.
Toby Bordelon: In some ways, I think you're less reliant on the business and convention traffic that is going to be slow to return. This is an interesting play, a little bit different than what you normally see when you think about Vegas casino. But a pretty good quarter, I think.
Jason Hall: I'm just curious here. With the reaction, stock fell, it's down about 10 percent or so. Did management say anything about staffing issues or any of the challenges, the great resignation issues? Those are the businesses that have been affected by staffing challenges. Did we get any indication that that's a problem they're having to deal with?
Toby Bordelon: Not a whole lot. That is a little bit of a concern. But they also have a lot of development going on too. They own a lot of real estate. They have a big development pipeline. I think there may be some concern over that. Like how fast is that going to come to market and what is the market going to be. Because we don't know. A huge development pipeline would've been awesome two years ago, but you want to see it play out a little bit more. I think there's something to that. There was one comment about you've got a lot of land and a lot of property. Is that more valuable or less valuable? The response was basically like, well, prices in Vegas are going up, they're not going down. But even if the land increases in value, that's not what we're after, we're after the development of that.
Jason Hall: You've got to monetize it.
Toby Bordelon: That takes a while. That's not like a next-quarter thing.
Jason Hall: No. That's five years. It takes time for that.