Red Rock Resorts Shares Struggling, But Fund Manager Remains Bullish

Posted on: August 14, 2019, 11:24h. 

Last updated on: August 14, 2019, 12:07h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Shares of Red Rock Resorts, Inc. (NASDAQ: RRR) are lower by nearly 37 percent over the past 12 months, one of the worst showings among domestic gaming stocks. But at least one mutual fund manager remains enthusiastic about the company.

Fund manager Ron Baron remains bullish on Red Rock Resorts. (Image: CNBC)

In a recent note to investors, Baron Funds CEO and Chief Investment Officer (CIO) Ron Baron discussed the Baron Growth Fund’s (BGRFX) position in the Station Casinos operator controlled by Frank and Lorenzo Fertitta as well as a stake the fund has in another regional gaming company, Penn National Gaming (NASDAQ:PENN).

Our gaming investments, such as Red Rock Resorts, Inc. and Penn National Gaming, Inc., possess scarce gaming licenses granting the right to operate in their jurisdictions, as well as, in the case of Red Rock, certain parcels of entitled land giving it the right for future footprint expansion in local Las Vegas markets,” said Baron in a copy of the note obtained by Casino.org.

Red Rock shares have sagged as investors have grown concerned about how long it will take for the company to generate adequate return on investment from its renovations of the off-Strip Palms. The company is into that property for over $1 billion after combining $690 million in refurbishments and the $312.5 million that was paid to buy the venue in 2016.

Still Optimistic

Over the past year, investors have punished small-cap gaming companies. Among comparably valued firms, Red Rock Resorts, with a market capitalization of $2.25 billion, isn’t even the worst offender over the trailing 12 months. That dubious distinction belongs to Penn National, which has tumbled more than 42 percent over that stretch.

Penn’s market cap is $2.14 billion. By comparison, $2.65 billion Boyd Gaming (NYSE:BYD) looks good against Penn and Red Rock, with a 12-month decline of 32.55 percent. The Baron Growth Fund also owns shares of Boyd.

Weighing on shares of Red Rock has been the company’s run-ins with employees over efforts to unionize. The push back on that front by the Fertitta brothers has drawn the ire of Democratic presidential contenders Julian Castro and Sen. Bernie Sanders of Vermont. Still, Baron is a fan of Red Rock stock.

The shares “declined in the quarter as investors grew concerned over earnings at the newly renovated Palms casino,” said the fund manager in the investor letter. “However, numbers continue to be in line with the ramping of a new property, and the company still expects the Palms to produce a strong high-single-digit return next year. This should generate more cash flow, which we expect Red Rock to use to pay down debt and reduce leverage.”

Big Bet By Baron

At the end of the second quarter, Baron Growth Fund allocated just under one percent to Red Rock, but other Baron funds own the name, and the fund company is listed as the largest institutional owner of the gaming company’s stock, controlling over 9.1 million shares.

The $7 billion Baron Growth Fund’s largest gaming-related position is a three percent allocation to Gaming and Leisure Properties, Inc. (NASDAQ:GLPI), a real estate investment trust (REIT) that owns casinos in 17 states.