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Wynn Bets On Vegas And Loses

Posted: May 06, 2008 10:25 AM by Glenn Curtis

Tickers in this Article: LVS, MGM, WYNN

Evidently, the house doesn't always win. In its first quarter, casino operator Wynn Resorts (Nasdaq:WYNN) saw quarterly net income drop roughly 20% to $46.7 million from $58.4 million last year. The company has bet big on its Las Vegas expansion, but the latest quarter suggests that this is a bet Wynn will lose. There could be even more downside for this already beleaguered stock.

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Craps In Vegas
In Q1 in Las Vegas the company generated $125.1 million in net casino revenue in the quarter, far below the $173.1 million it reported last year. It generated adjusted property EBITDA of $68.4 million, which is also down from the $111.2 million it turned in last year. Occupancy levels at Wynn Las Vegas ticked down from 96.2% last year to 95.8% in the most recent quarter. Meanwhile its average daily rate, calculated as total room revenue (less service charges, if any) divided by total rooms occupied, has come down from $310 to $298. (For related reading, check out Earnings: Quality Means Everything.)

The Las Vegas numbers are bad news for a couple of reasons.

First and foremost, although I have little doubt that the Las Vegas market as a whole will ultimately rebound, this market is pretty important to the company and the short-term problems are going to hurt. According to Wynn, Las Vegas constitutes about 34.6% of the company's total EBITDA. That's pretty big.

My second concern is that Wynn is dumping a truck load of money into expansion within the Las Vegas market. The company is building "Encore", another huge gaming facility right in the heart of Sin City. It's expected to sport a roughly 72,000 square foot casino, restaurants - the works. It's set to open in December 2008.

Now don't get me wrong, Wynn knows Las Vegas, and I suppose there is logic in building during a lull; plus, it should help make it more competitive with MGM Mirage (NYSE:MGM) and Las Vegas Sands (NYSE:LVS). However, if the Las Vegas market is already weak, how will that casino fare once it swings open its doors? I sense an extraordinary amount of risk there.

Too Many Eggs In The Macau Basket
At the risk of sounding like a broken record, I'm concerned about Wynn's Macau operations. Macau has been Wynn's ace in the hole over the past year or so, and if this market falters, Wynn will be in even deeper trouble.

In the most recent quarter, Macau's occupancy rates stood at 88.5%, a big surge over the 84.8% Wynn reported in the comparable period last year. Meanwhile, its average daily rate stood at $276 versus $245 last year. I'm not sure how long Wynn can keep this up. It isn't just the U.S. economy that's fragile these days. There are concerns about China and its ability to keep its economy humming. And other Asian/Pacific Rim economies that have some dependency upon the U.S. economy may also be at risk.

Sell-side analysts have no doubt noticed Wynn's dependency on Macau. This may cause them to soften their full-year earnings estimates going forward. Again, if Macau stumbles, even a bit, it could mean a lot to earnings. We could start to see the consensus numbers for 2008 and possibly 2009 ratcheted down in the days ahead as the result of this risk. (To take a closer look at forward looking earnings estimates, read Earnings Forecasts: A Primer.)

Bottom Line
Wynn has handcuffed itself to Las Vegas, but given the recent performance this looks like a bad move. True, it's expansion plans could revitalize the stagnant tourist market there, but it's more likely that the company is just throwing good money after bad, at least for the short term. Macau has been Wynn's money tree for several years, but I see limited upside in the area now. I think it makes sense to steer clear of the stock at this point.

By Glenn Curtis

Glenn Curtis started his career in the 1990s as an equity analyst for a regional firm in New Jersey. There, he covered companies in the technology, entertainment, and gaming industries. Curtis has since worked as a financial writer at a series of both web and print publications, including TheStreet.com and Registered Rep Magazine. He has held his series 6,7,24, and 63 securities licenses.

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