Wynn Resorts’ 4Q10: spectacular results from Wynn Macau

the results

WYNN reported 4Q10 and full year 2010 earnings results after the market close in New York on February 10th.

On February 1st, the company announced it would release its figures on February 24th, but a week later moved the date up to the 10th.

(I read this as signalling that the results were extremely good and WYNN was worried about their somehow leaking out in the intervening two weeks.  I appear to have been the only one to do so, however, since the stock traded flat on the two days before the conference call.)

Wynn reported revenues of $1237.2 million for the December quarter, up 52% year on year.  Earnings were $114.2 million, or $.91 per share.  That compares with  loss of $5.2 million or -$.04 per share in the closing three months of 2009.  Wall Street analysts had been estimating $.66, so the actual number was over a third higher.

Interestingly, the stock initially sold off by several percent in the aftermarket Thursday night, both before and after an upbeat conference call.  Stock price weakness continued in early-morning Friday trade.  Selling abated quickly, however, and WYNN ended the day up 7.45%.

the details

Macau

As I pointed out on January 5th, the Macau market experienced record gambling business in the December quarter.  Wynn Macau also gained market share, implying–at least in part–that it was unusually “lucky” during the period (what casinos report as revenue is not the amount bet by customers but the (small) portion of that figure that the casino wins).  In that post, I said I thought quarter on quarter revenues might be up by a third, and that (like any other well-run company) WYNN would encourage its accountants to find ways to tamp down the windfall gain.

As it turns out, 1128 reported revenues of $912.1 million, up 36% quarter on quarter.  Win percentage at high-stakes baccarat, the staple of the Macau market, was 3.15% of the amount bet for 1128 during the December period vs. 2.88% in the third quarter.  (WYNN thinks a normal range for that percentage to be from 2.7% to 3.0%.)

Yes, 1128 did increase its reserve for bad debts by $11 million but its operating income still rose from $124.5 million in the September quarter to $214.5 million in the December period.  (That’s what operating leverage is all about.)

Las Vegas

Slow recovery continues.  Convention business is gradually coming back.

But there’s still a glut of hotel rooms in Sin City, a fact that is holding room rates down.  CityCenter and the Cosmopolitan, the last venues to open in a flurry of capacity expansion, added almost 10,000 new rooms, or 15%, to the total on the Strip in a little more than a year.  Ouch!  That’s especially bad for the Las Vegas casino companies because their properties have been built with the idea of generating  half the firms’ operating revenue from being resort hotels, not from gambling.

So in Las Vegas, WYNN remains cash flow positive but earnings negative. For the December quarter, WYNN had an operating loss of $13.4 million.  At least that’s better than a year ago, when the red ink crested on the operating line at $56.7 million.

2011 to date

–Macau continues to boom, with the market growing by about a third, year over year, in terms of casino “win” in January.  1128’s win percentage for the quarter to date, however, has dropped from its recent highs to an unusually low 1.9%–meaning the company’s gaming profits aren’t much better than flat for the month v.s 2010.

That’s just a fact of life when dealing with high rollers, and has no investment meaning.  Nevertheless, this is the likely reason 1128 has sold off by 20% or so in Hong Kong over the past few weeks.

WYNN clearly thinks that the best is yet to come, as transportation links with Hong Kong and the mainland are improved.

–Chinese New Year was good for WYNN.  It produced the biggest night in the history of the Wynn Resort in Las Vegas, with table win of $16 million +.  And it yielded one-day casino win in Macau of $46 million +.

–In contrast with Macau, WYNN’s casino win percentage is Las Vegas is unusually high at the moment.

–1128 is planning to add two more to its current roster of ten junket operators (who bring groups of high-rollers to the casino) during the spring.  It hopes to receive final permission before summer to begin construction work on its new $2.5 billion casino in the Cotai section of Macau.  That would mean opening in early 2015.

the stocks

1128’s current market capitalization is HK$96 billion.  WYNN’s ownership interest in 1128, therefore, is worth about US$9 billion.  Wynn itself, which has outperformed 1128 by about 10% over the past year, has a market cap of just over $16 billion.  In simple terms, this means investors are paying $7 billion for:  the company’s Las Vegas operations, the royalties/management fees WYNN receives from 1128 and exposure to possible new ventures outside of Macau.  My guess is that this works out to cash flow return of 5% or so, assuming Las Vegas breaks even on the operating income like this year.

I hold both, with about a 3:1 ratio of WYNN:1128.  My overall holding is big enough that I’ve been forcing myself to sell bits and pieces just to control risk.

Neither stock is exactly undiscovered.  Still, I think that both will be at least mild outperformers of their markets in the year ahead.  If both stocks traded in the US, growth investors would gravitate toward 1128 and their value counterparts would tend to select WYNN.  The latter might even short 1128 to get “pure” exposure to the parent company.

The reality, though, is that the two trade in different markets (see my post on this topic), with different investment preferences and knowledge bases.  So the either/or strategy has risks that are not obvious.  In particular, it’s possible that 1128 could get caught up in a general asset shift away from emerging economies toward developed ones.  I don’t see that yet with 1128, and I don’t expect it will happen, but it’s possible.

My only useful thought in this regard is that a negative market reaction to 1128’s current run of bad casino luck in 1Q11 could present a buying opportunity.  I think that’s happening now with 1128.  Given that Wall Street analysts and US investors don’t seem to assimilate this kind of information very quickly (look at how badly they missed 4Q10 eps), the same may occur with WYNN when the 1Q11 earnings report comes out.

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