2Q11 for Wynn Resorts (WYNN) and Wynn Macau (HK: 1128): better than I’d expected

WYNN reported results for 2Q11 after the close yesterday.  Revenue came in at $1367.4 million for the three months ending in June, up 32.4% over the comparable period in 2010.  Sales were up 36.7% in Macau and 22.8% in Las Vegas.

EBITDA for WYNN was $447.0 million, a 58.9% gain over the prior year.  In early July, Las Vegas operations exceeded its results for full-year 2010.

Earnings per share for the quarter were $.97.  Adjusted for a charitable contribution to the University of Macau (charged against current earnings, but payable in installments through 2022), the figure was $1.60, substantially higher than analysts’ estimates of a shade below $1.10.

If we were to guess that WYNN will earn $6 this year, the stock is trading at 27.5x current earnings;  if we pluck HK$1.50 a share out of the air for 1128, that stock, which went down overnight in Hong Kong on the results, is trading at 17.5x.

what caught my eye

Obviously, WYNN is doing extremely well operationally, both in Las Vegas and in Macau.  Both WYNN, up 59% year to date through yesterday, and 1128, up 54% through Hong Kong trading today, have made huge gains for shareholders.  But neither looks outrageously priced, given its growth prospects.  More on the stocks below.

Here’s what jumped out at me about the quarter.

Las Vegas

WYNN had a stellar March quarter.  What made it unusually profitable was extraordinary good luck at table games, where the house “held” over 30% of the amount bet.  This compares with WYNN’s historical experience of retaining 21%-24%.  I figured that a return to normal could easily clip $20 million off 2Q11 operating profit, and possibly a lot more–and that the market hadn’t noticed this possibility.

The actual quarter on quarter fall was about $40 million.  Nevertheless, Las Vegas EBITDA was just better than flat.  Why?  Non-casino profits are beginning to pick up very noticeably.

Two factors are at work:

–Domestic business is strengthening.  Lots of guests are booking at the last minute–and therefore paying higher prices for their rooms. 

–Wynn Macau has raised the parent company’s profile in Asia.  When Chinese visitors come to Las Vegas, they’re increasingly staying, and gambling, at the Wynn properties.  At $240 a night, on average, a Wynn room in Las Vegas is a bargain compared with the $314 it’s charging in Macau.  Also, it’s possible that the presence of more Asian gamblers is changing Wynn’s table game hold percentages in a favorable way.

As far as future bookings are concerned, Wynn’s second half will be surprisingly strong.


Two observations:

1.  The June quarter for Wynn Macau was extremely strong, at around HK$.45 a share (which annualizes to HK$1.80).  The timing of the charitable contribution to Macau University makes this less obvious, and sets the stage for large positive earnings comparisons next year, almost no matter what the economic circumstances.

2.  Quarter on quarter, the Macau market grew by about 12%.  So, too, did 1128’s results, despite the fact that the opening of new casino space by rivals means that 1128 represents a smaller percentage of the market.  This is the Wynn formula for success:  do, say, 14% of the business in a market while owning 10% of the plant and equipment.

The Hong Kong market doesn’t “get” this yet.  Investors there are concentrating on plant additions as the key to success–unaware that a casino can “add” capacity by raising table limits.

the stocks

I think both are still attractive.  Personally, given that my positions in both are large and acquired at much lower cost, I find it psychologically hard to get really excited about either.  But the numbers say I should be.

WYNN or 1128?  WYNN’s market capitalization is slightly over $20 billion.  Its interest in 1128 represents $13 billion, or about two thirds of the total.  That leaves $7 billion for the US properties, which have a large amount of operating leverage but aren’t running much north of net profit breakeven.  I suspect some US investors buy WYNN simply because they find it too hard to buy 1128 directly (if so, they should look at Fidelity’s international trading service).  In addition, there’s some risk in holding stocks in a Hong Kong market whose attitudes toward gambling stocks and whose general rules of operation you may not be familiar with (see my post).

I consider myself an aggressive investor.  About two-thirds of what I own is WYNN, one-third 1128.  This means that I have a roughly 50/50 split between the US and Macau.

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