The world's hottest gambling market these days is Macau.
It's the only place where casino gambling is legal in China. Wynn Resorts has one of just six casino licenses to operate there.
So what's the biggest growth story for Wynn? Las Vegas, of course.
"Vegas is showing unbelievable strength," said Larry Klatzkin, an analyst at Jefferies & Co. "Macau is strong, but we know that. Las Vegas is definitely driving a lot of their growth."
The Vegas market keeps surging, with the economy not retarding consumer spending at all. That market is growing by about $500 million a year, and the Strip should hit $6.5billion in casino revenue this year. There is very little new competition on the horizon for the next two years.
Wynn's high-end resort on the Strip's northern end, Wynn Las Vegas, is going gangbusters. Chief Executive Steve Wynn is known for his luxury resorts that bring in the big spenders. They're flocking to his two-year-old Vegas property. Operating cash flow there -- using adjusted EBITDA -- jumped 58% in the second quarter to $115.3 million. EBITDA stands for earnings before interest expenses, taxes, depreciation and amortization.
That all helped Wynn Las Vegas' results blow out analysts' expectations when Wynn posted second-quarter results.
Because Wynn caters to high-end gamblers, old-fashioned luck plays into its results more than for most casinos, Klatzkin says. In the long haul, that evens out. But with high rollers, the casino's gaming wins can be exaggerated and move results one way or the other in a quarter.
"The stats work over time, but it can make the results volatile from one quarter to the next," Klatzkin said.
Klatzkin figures Wynn had about $15 million worth of good luck last quarter. Still, he said, another $30million in cash flow gains points to powerful growth in both of Wynn's markets.
Earnings Growth
Wynn earned 92 cents per share in the second quarter, nearly doubling the consensus estimate of 53 cents, after posting a loss of 5 cents in the year-ago quarter. Sales jumped 151% to $687.5 million. But that included results from Wynn Macau, which wasn't open in the year-ago quarter. Analysts polled by First Call expect this year's earnings to soar nearly 400% to $2.31 per share from 48 cents last year. They see a 13% gain next year to $2.60.
Even though the Las Vegas property has surprised analysts, Macau also has huge potential.
"The prospects for this property are staggering," Morningstar analyst Sumit Desai wrote in a recent report.
Macau just passed the Vegas Strip as the world's biggest gaming market. It also is the fastest-growing. About 300 million people live within a five-hour drive, Klatzkin says, equal to the entire U.S. population.
That market is already boosting Wynn's results. Its Macau cash flow jumped 58% from the fourth quarter last year -- the first full quarter its resort was open -- to $92.7 million last quarter.
The VIP business has fueled growth in Wynn's Macau business, Robin Farley, an analyst at UBS, wrote in a recent report. That didn't push Wynn's margins down, even though those high rollers typically result in lower margins for casinos.
Wynn also was able to notch up its Macau market share, Farley says. It rose from 15% in the first quarter to between 16% and 17% last quarter despite two new rival casinos opening.
Steve Wynn, a legend in Las Vegas casino development, ran Mirage Resorts for more than a quarter-century before selling the firm in 2000. He acquired the land for Wynn Las Vegas a few months afterward and opened the resort in April 2005.
He's on the way to building a new casino empire. His company is waiting for approval to build three hotels and casinos in Cotai, another part of Macau.
"This is crucial to the long-term prospects for the company," Klatzkin said. He expects the first facility there to open in mid-2010.
Beyond that, Wynn is expanding its Macau casino by early next year. And it plans to build a second hotel at the Macau site by 2010.
Wynn also is expanding in Vegas. It's building Encore, a 2,034-suite hotel and casino, next to Wynn Las Vegas. The $2.1 billion project should open in early 2009.
All that construction spending brings risk with it, Klatzkin says.
"He's a big-budget spender," Klatzkin said. "It's not a big risk, but you have to acknowledge it."
Debt Management
Wynn has $1.6 billion in debt on its books. It should be able to manage that, Desai says. But any big cost overruns on its new projects could prove "devastating."
The Vegas property should keep prospering. Demand is rising faster than supply. Just the Palazzo, which serves a different market, is opening before 2009, Klatzkin says.
"There's no new competition coming in for two years, in a strong market that continues to grow," he said.
When several high-end properties do come in, Wynn sees it as giving a boost to his business.
"We don't have any walk-in business," Wynn said on a conference call to discuss second-quarter earnings. "We are an island. And we are about to become the cross-section of the fanciest neighborhood on the Las Vegas Strip. I am feeling wonderfully encouraged by the improvement in the neighborhood."
Macau, however, will have much more new competition. Klatzkin doesn't see that as an issue, due to the strong demand.
But Desai figures the building spree could lead to too much capacity and lower returns for everyone there.
Published by IBD
Labels: Las Vegas, Macau, WYNN
