Good (not great) June quarter from Wynn Resorts and Wynn Macau: negative stock market response

WYNN’s 2Q2010 results

WYNN reported second quarter earnings results after the market close in New York yesterday.  Revenue for the company during the three months ending June was $1.o billion.  Earnings per share, adjusted for unusual items, were $.52 vs. $.09 in the comparable quarter of 2009.  That’s way above analysts’ estimates of $.41 (even just using the back of an envelope, I don’t understand how the consensus could have been that low, however).

As has become usual, there’s a stark contrast between the performance of the WYNN casinos in Las Vegas and the operation in Macau.  The former continue to limp along, showing positive cash flow but bottom-line losses; the latter continues to rake in money at an astounding rate.

WYNN fell by about 3% in after-hours trading in the US.  1128 (Wynn Macau) dropped by about 3.5% in Friday Hong Kong trading (which began at 9pm EST on Thursday).  “Weak” results from Macau are probably the reason.

details

I should mention at the outset that I’ve tried a number of times to access the replay of the company earnings conference call, without success.  So what I’m writing comes just from looking at the numbers.

Macau

The amount gambled in the Macau market rose a mind-boggling 80% year on year in the second quarter.  That figure “sagged” to 65% in June, apparently as Asian high rollers decided to concentrate on watching the World Cup.  Don’t worry, though.  Business has recovered in July.

The market numbers aren’t a secret, by the way.  They’re posted on the Macau casino authority (in Chinese, Portuguese and English) on its website.  Each month, they also manage to be leaked early by a Portuguese news service.

If we look at the first quarter, the Macau market grew by 57% vs. the beginning of 2009 and the amount gambled at the Wynn casino almost doubled.  In contrast, despite the opening of the Wynn Encore in the former Portuguese colony, so Wynn had more capacity, the amount wagered at 1128 grew “only” by 72%.  WYNN’s win percentage in Macau during the June period, which is what the WYNN income statement shows as revenue, was higher than normal.  So the fact that 1128 lagged the market–while very clear from the company press release–is hard to see from the income statement figures alone.

The high roller market can be very quirky on a short-term basis.  So there isn’t really any reasonable conclusion to draw out of one quarter’s performance.  I think 1128 is still on track to earn at least HK$.80 a share this year, putting it on a multiple based on today’s price of under 17.  I think the stock would easily trade at twice that if it were a US stock–but, of course, it’s not.

Las Vegas

After eliminating unusual items, it seems to me that WYNN lost about $40 million in the first quarter and just over $30 million in the second.   Hotel occupancies were up by about 6% year over year but room rates were down by almost 10%–a reflection of the overcapacity that is affecting the market, and also of the juggling act between room rate and occupancy that hoteliers constantly perform in a time like this.

Table game play was down slightly and slot machine play (less important for WYNN) dropped by close to 20%.  But an increase in nightclub business and entertainment more than offset this.

The current lackluster situation for WYNN in Las Vegas should come as no surprise to investors, since the offering documents for a recently completed bond refinancing contain the essential information.

my thoughts

For WYNN, it’s thank goodness for Macau, where the company is waiting for government permission to build a third casino in Cotai.

1.  If we were to take an aggressive stance and project HK$1 in eps for 1128 for this year and assign a 20 multiple to that, then WYNN’s 72.3% interest in the subsidiary would have a value of just under US$10 billion.  This compares with a total market cap for WYNN (as I am writing this) of about US$10.5 billion.

That’s the optimist’s view.

2.  As reflected in the current 1128 stock price, however, WYNN’s holding is worth US$6.4 billion.  Add cash of US$1.7 billion on the balance sheet and you get an implied US$2.6 billion value for the Las Vegas operations.  This is too high, in my view.  As I mentioned in my post on WYNN’s March quarter 2010 results, US$1.8 billion would be a better estimate for today.

3.  A more realistic–maybe even conservative–assumption for 1128 would be earnings of HK$1 over the coming 12 months and a multiple of 18.  That would imply a value for WYNN’s holding of about US$9 billion.  Add to that mild recovery in Las Vegas that might boost asset value to US$2.3 billion, toss in the US$1.7 billion or so the company has in cash on the balance sheet and the total WYNN value would be US$13 billion.

What does this all mean?

Valuation #2 suggests that WYNN is fairly valued at today’s price if we incorporate just the here and now.  If we think nothing particularly good–or bad–will come out of Las Vegas in the foreseeable future, then WYNN should trade based on movements in 1128.  Each dollar change in the 1128 share price would imply a $500 million change in WYNN’s asset value.

Wall Street is a futures market, though.  Valuation #3 is my base case.  This would imply about 20% upside for WYNN in the coming year, with better potential–but greater risk–for 1128.

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