the results

WYNN reported 3Q11 results after the closing bell for trading in the New York market on Wednesday.  Revenues were $1.3 billion, up 30% from the comparable period of 2010.  EBITDA (a measure I don’t particularly like but which some investors use) was $381.1 million, up 39% year on year.  Eps were $1.05 vs. $.39 in 3Q10.

The report came as a disappointment to Wall Street, which had been expecting a tripling of earnings per share to $1.18.

details

Wynn Macau

Revenues for Wynn in the SAR were $951.4 million for 3Q11, up 42% year on year.  What disturbed the market, however, was not that eye-popping number, but the fact that the figure was down slightly from the $976.5 million Wynn Macau posted in 2Q11–in a market that was up about 10% quarter on quarter.

Win percentages for various games were within normal ranges, so Wynn being unusually unlucky wasn’t the reason it lagged behind the market.  Rather, it seems that at least some high rollers who might otherwise have visited 1128 were instead checking out the newer casinos that have opened this year.  To some degree, 1128 benefited from this tendency when the Encore opened.  Now the shoe is on the other foot.

Typically gamblers ultimately return to the venues where they feel most comfortable and get the best service–which means Wynn.  The company says it is seeing this happen in October.

Nevertheless, it’s also possible that 1128 is bumping up against the limits of its ability to take in money in Macau with the hotels and casino space it has now.  That amount will gradually rise, with economic growth in China and with inflation.  But if capacity constraints are an issue, comparisons may be pedestrian (+10% or so?) until 1128’s new casino in Cotai opens in 2014-15.

Wynn Las Vegas

On the 2Q11 earnings conference call, WYNN was very enthusiastic about prospects for 3Q11, which in normal times (which these are clearly not) would be a seasonal low point.  Hotel bookings were unusually strong and the company was musing that its table games win percentage might be permanently drifting northward.

I guess non-casino revenues turned out to be pretty much as anticipated, at $266 million.  That was up 11% year on year and down slightly from the 2Q11 figure of $276 million.  From WYNN’s tone three months ago, though, I’d expected a bit more.

Casino revenue for WYNN came in at $126.9 million for the quarter.  The compares with $158.3 million in 2Q11.  It was also slightly less than in the comparable period of 2010.  But the amount bet in the WYNN Las Vegas casinos’ table games was up sharply.

What happened?  The company was simply very unlucky at baccarat last quarter.  The company’s win percentage on table games for 3Q11 was 18.3%.  That’s sharply below the expected level of 21%-24%, and the 27.6% achieved during 2Q11.

If table games win for the quarter had been normal, eps would have been about $.20 higher than actually reported;  win at the 2Q11 rate would have meant eps about $.45 higher.

The company says that win percentages have returned to normal in October.

my thoughts

1128 has lost about a third of its market value on worries about the mainland economy, and on concerns that Wynn and Encore may lose customers to newer casinos.  I still think that 1128 has a shot to make $1.50 a share this year, and (worst probable case) $1.65 next.  Maybe the subsidiary will come in $.10 short for both periods, but not much more than that.  12x earnings seems much too cheap to me.

1128 represents two thirds of WYNN’s market value.  The remaining $5 billion is the Las Vegas operations, which though still anemic are showing progressively stronger results.  Cash flow generation in the US is running at about $400 million, and rising–meaning that domestic operations would be yielding 8% if considered as a stand-alone income vehicle.  The US operations aren’t being run simply to generate cash.  In fact, it sounds as if WYNN would welcome the opportunity to build a casino in Miami, if asked.  But looking at them as a quasi-bond suggests (to me) that they have considerably more value than the market is now awarding them.

All in all, I’m happy to hold the WYNN and 1128 shares I own.  At the moment, however, it’s hard to see where near-term earnings acceleration is going to come from.

In fact, an aggressive trader–which I’m not–might think of switching some money into LVS.  I don’t think LVS is as strong a company as WYNN, but it’s cheaper and it has more potential near-term earnings momentum–coming from Singapore and its soon-to-open new casino in Macau.  But market sentiment can be a funny thing.  It’s tide can quickly reverse.  Even news on possible resolution of EU financial problems might be enough to swing investor attention back toward the Wynn family of companies.  For me, I’m content to be patient with what I consider two undervalued issues.