the results

WYNN reported 1Q11 financial results after the close in New York last night.  Earnings per share were $1.38 vs. $.27 in the opening three months of 2010.  The results substantially exceeded  the Wall Street analysts’ consensus for the quarter of $.79.

The main factors behind the blowout earnings?  …continuing superior performance in the fast-growing Macau market; and the gradual recovery of Las Vegas, where WYNN also had unusually good luck at its tables during the quarter.

WYNN announced an increase in the quarterly dividend from $.25 to $.50, as well.

the details

Macau

WYNN has had enormous success with its slot machines and its non-gaming attractions–hotels, restaurants, retail.  Nevertheless the key to profits in this market is high-stakes baccarat.  During the 4Q10 conference call, management indicated that, while customers were still coming through the doors in record numbers, its “win” (gross profit) for 1Q11 to that date was barely a third of normal.  This is a fact of life in the high-roller market–and eventually straightens itself out.  The comments suggested, however, that 1Q11 earnings from the SAR might be sub-par.

They weren’t.  Wynn Macau seems to have had a run of good luck later in the quarter just as strong as the unfavorable streak disclosed in the January conference call.  For the three months as a whole, win percentage for 1128 was 2.69%, just below the 2.7%-3.0% range WYNN considers normal.

Overall, Wynn Macau earned $190 million for the three months, up 70% year to year.  Remember, though, that the 2011 figures include the Encore in Macau that opened during 2Q10.  So future earnings comparisons won’t be quite so strong.

Las Vegas

WYNN earned about $36 million in Las Vegas during 1Q11, compared with a loss of around $54 million in 1Q10.  Operations are clearly on the mend.  Non-casino operations are doing especially well.  However, WYNN had an exception run of good luck during the quarter at its tables in Nevada.  The company thinks the normal range of table win is 21%-24% of the amount wagered.  It achieved a 30.4% win rate during the opening three months of 2011, which added about $50 million above normal to the bottom line.  

So, while 1Q11 shows tremendous improvement over the dark days of recession, it’s probably better to think of WYNN’s Las Vegas operations as being strongly cash-flow positive, but around profit breakeven and on a slow upward trajectory.

“fair share“

This is WYNN’s fundamental internal measure of the health of its gaming operations.  It’s a company’s share of market revenue divided by its share of the market’s gambling equipment (or floor space) for slot play or table games.  If, for example, you have 10% of the table games or slot machines in a market and do 10% of market revenue, you have a “fair share” of 1.  If you have less than that, all of your marketing and promotion efforts to bring customers to your premises in effect subsidize your competitors.  You act as a “dormitory” for them, as Steve Wynn puts it.  If you have a “fair share” over 1, the others are subsidizing you.

How does WYNN fare on this measure?  …extremely well.

The specifics:

–In Macau, the company has 10% of the table games and a 14% market share;  it has 8% of the slots and a 22% market share.

–In Las Vegas, it has a “fair share” of 2.5 in table games and 1.0 in slots.

In a nutshell, that’s the WYNN story.

the stock

I think WYNN will continue to be a mild outperformer in the US market over the year ahead.  To my mind, Macau is at least several years away from investors having to seriously consider whether the market is maturing.  And the question of Las Vegas recovery has changed itself during 2010 from “if” to “how fast” –meaning that the worry of further weakness there has all but disappeared.

Valuation is the chief investment issue.  1128 is up 58% year to date and is nearly triple its IPO price of late 2009.  It’s trading at 22x earnings for this year, assuming Macau market revenues stay at the 1Q11 level for the rest of the year.  So it’s hard to say that the subsidiary’s superior operating model is still a secret, yet to be worked out by the Hong Kong market.

WYNN’s share of 1128 is worth about $13.5 billion currently, and represents almost 75% of the value of the parent company’s stock.  That leaves $4.7 billion for the rest of the company (Las Vegas operations + royalties and management fees from 1128), suggesting that non-Macau is trading at a little over 10x cash flow.

I don’t think any of these figures are outrageously high.   I don’t have any inclination to sell. ( I own both WYNN and 1128.  I’ve trimmed the latter a bit recently and sold covered calls on a small part of the former, but that’s because my position sizes have become too big.)  But I also don’t feel a strong need to buy either 1128 or WYNN at today’s prices.