October 24, 2016 concludes the 180-day IPO lockup period on Red Rock Resorts Inc (NASDAQ:RRR). As described by the SEC, at this point, RRR’s pre-IPO shareholders, directors and executives will have the chance to sell previously restricted shares. The event could put downward pressure on the stock and open a short opportunity for aggressive investors.
We suggest selling or shorting RRR prior to the event to take full advantage of an impending decline.
Business Overview: Operator of Casino and Entertainment Properties
Formerly known as Station Casinos Corporation, Red Rock Resorts Inc (NASDAQ:RRR) owns, develops, operates and manages hotel, casino and gaming properties. These include Red Rock Casino, Green Valley Ranch, Sunset Station, Palace Station, Boulder Station, and others primarily in the Las Vegas, Nevada, area. The company also has gaming facilities in western Michigan and northern California.
Its portfolio includes 21 casino and entertainment properties, 19,300+ slot and video poker machines, 4,041 hotel rooms, 302 table games, 53 bars and lounges, 113 food and beverage venues, 96 movie screens, 26 live entertainment venues, and 282 bowling lanes.
During the second quarter of 2016, Red Rock Resorts announced that its subsidiary, Station Casinos LLC, entered into an agreement to acquire the Palms Casino Resort for a total of $312.5 million. The company announced the closing of the acquisition on October 3. In addition, RRR completed a $2.4 billion refinancing of the Station Casino credit line, which added a higher borrowing capacity, reduced borrowing costs and added additional financial flexibility.
Management Team Highlights
According to company filings, President Richard Haskins, Esq. has served as President of Red Rock Resorts and Station Holdco LLC since October 2015. He joined Station Casinos in 1995 and has held increasingly responsible positions during the last 18 years. Mr. Haskins is a member of the American Bar Association, the Missouri Bar Association, and the Nevada Bar Association.
CFO Marc Falcone has served in his position since November 2010. His previous experience comes from financial positions at Goldman Sachs, Magnetar Capital, Deutsche Bank Securities, and Bear Stearns & Co.
Competition: Wynn Resorts, Las Vegas Sands, MGM Resorts
Currently, approximately 40 major casino and gaming properties are located on or near the Las Vegas Strip. Red Rock Resorts Inc (NASDAQ:RRR) faces competition from both restricted and non-restricted sites, with restricted gaming casinos having 15 or fewer slot machines. The largest casino companies are Las Vegas Sands (NYSE:LVS), MGM Resorts (NYSE:MGM), Caesars Entertainment (NASDAQ:CZR), Wynn Resorts (NASDAQ:WYNN), Penn National Gaming (NASDAQ:PENN), Pinnacle Entertainment (NYSE:PNK), and Boyd Gaming (NYSE:BYD).
Despite being >10X smaller with regards to market cap than many of its public competitors, RRR has a P/E only slightly above that of LVS, MGM, and WYNN, and a P/S just below that of the industry average (2.1).
Strong Early Market Performance
Red Rock Resorts’ IPO priced at $19.50 per share, at the midpoint of its expected price range of $18 to $21. The stock closed on the first day of trading at $18.70. Since then, the stock climbed to reach a high on August 3 of $23.20. It declined from then to $20.80 on September 13. The stock currently trades around $23.31 (early sessions Oct. 6, 2016).
Major Insiders Hold Over 88M Restricted Shares
As noted above, RRR’s pre-IPO shareholders, directors and executives will have the chance to sell previously restricted shares, which number 88.6 million. This figure dwarfs the 27 million offered to the public at the company’s IPO.
Conclusion: A Smart Short
Our firm’s research specifically identifies a 4.2% drop (1) on average in a window of time, ideally (-11, 9) days surrounding the event day (0). This occurs particularly for firms, such as RRR, which have increased in price since their IPO and have a diverse set of insiders. If even some decide to sell, the oversupply could send RRR’s stock price tumbling down.
We suggest selling or shorting ahead of the event to take full advantage of impending declines.
Disclosure: I am/we are short RRR.
Note: This article is written by Don Dion. Visit his site at DRD Investments for expert analysis on current and upcoming IPOs.