On Friday, Jefferies analyst Cassandra Lee revised the firm's outlook on Red Rock Resorts (NASDAQ:RRR), downgrading the stock from Buy to Hold and adjusting the price target to $51 from the previous $64. Currently trading at $44.72, near its 52-week low of $44.18, InvestingPro analysis suggests the stock is undervalued.
The downgrade reflects concerns over near-term disruptions and potential expansion plans at the company's properties, which are expected to keep leverage ratios higher than the target.[Get access to 10+ key insights and detailed financial metrics for Red Rock Resorts with InvestingPro, including exclusive Fair Value calculations and comprehensive Pro Research Reports.]
Red Rock Resorts has been under scrutiny by Jefferies due to its leverage situation, with anticipated leverage ratios for 2025 and 2026 estimated at 4.1x and 4.2x, respectively. The company's current Debt to Common Equity ratio stands at 19.7x, with Total (EPA:TTEF) Debt to Total Capital at 0.42x. This is significantly above the company's target leverage ratio of 3.0x.
The analyst pointed out that despite the successful opening of Durango in December 2023, these financial metrics are likely to remain elevated in the near term, a concern echoed by five analysts who have recently revised their earnings expectations downward according to InvestingPro data.
The forecasted renovations at several of Red Rock Resorts' properties are set to have a substantial impact on earnings before interest, taxes, depreciation, and amortization (EBITDA). Specifically, in 2025, the Green Valley Ranch is expected to see a reduction in property EBITDA by $11.5 million, Sunset Station by $5.4 million, and Durango by $5.9 million.
Moreover, the possibility of further expansion at Durango, coupled with the initiation of new property developments, is currently being considered. These factors contribute to the analyst's perspective that the company's financial leverage will remain higher for the foreseeable future, prompting the revised rating and price target.
In other recent news, Red Rock Resorts has been in the spotlight for various reasons. Analysts from Mizuho (NYSE:MFG) Securities have adjusted their stance on the company, downgrading its stock from Outperform to Neutral due to potential risks to the company's financial estimates for 2025 and a slower than anticipated development and construction pipeline.
Despite these concerns, Red Rock Resorts reported record-breaking results for the third quarter of 2024. The company's Las Vegas operations significantly contributed to this success, with net revenues increasing by 13.9% year-over-year to $464.7 million. Additionally, the adjusted EBITDA rose by 5.8% to $202.6 million.
The company also announced a cash dividend of $0.25 per Class A common share. Looking at future plans, Red Rock Resorts revealed its capital expenditure plans for the coming year, which include major renovations and the development of new properties in the Las Vegas Valley. These expenditures for 2024 are projected between $185 million and $195 million, excluding the Durango project.
Despite current challenges, Red Rock Resorts anticipates improved performance in 2025 and beyond, with plans to potentially double its portfolio size with over 450 acres earmarked for future developments in the Las Vegas Valley.
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