the report
WYNN reported 1Q12 earnings results after the close of stock trading in New York on May 7th. Adjusted earning per share were $1.33 ($152.0 million) for the period, down by about 4% from the $1.38 ($173.4 million) the company earned in the opening quarter of 2011. Actual net was down by $21.4 million, or 12% yoy. The forced redemption of Aruze USA’s 22.5 million shares in February explains the smaller decline in the per share figures.
Wall Street was not impressed. The stock had been declining somewhat already from the intraday high of $138+ it achieved early in the month, on the announcement that Wynn Macau had received a government go-ahead for its new Cotai casino. The apparently weak earnings kicked the decline into overdrive.
The report even prompted a comment from the normally reliable Financial Times–which appears not to like the gambling industry much– to the effect that it might be the canary signalling bad times ahead in the Las Vegas casino coal mine.
The reported earnings don’t tell the whole story, however. The reality is that WYNN had a good quarter, not a bad one.
drop vs. take: i.e., gross revenue vs. net
What casinos count as revenue is not the amount wagered by customers. Rather, it’s the portion of total wagering “held” or “won” by the casino. That is, revenue is the amount customers lose on their wagers. This means casino revenue is not only a function of the amount bet but also of “luck,” or random variation away from theoretical or historical winning percentages.
Such variations–plus or minus–rarely show up in slot machine results, since there are so many transactions in a quarter. But they often do with table games, especially in the high-roller segment that WYNN specializes in.
WYNN’s 1Q12 earnings comparisons in both Las Vegas and in Macau are skewed unfavorably because of such random factors.
Las Vegas
EBITDA was $100.9 million in 1Q12 vs. $132.1 million in 1Q11.
Table games drop was $654.4 million in 1Q12 vs. $634.0 million in 1Q11. Win percentage was 22.8% in 1Q12 vs. 30.4% (historically, win has been between 21%-24%; on the 1Q12 conference call, Steve Wynn said he’d never seen a win percentage this high in his casinos). because of this difference, win was $149.2 million in 1Q12 vs. $192.7 million in 1Q11.
At a 30.4% win percentage, this year’s results would have been $198.9 million. So the comparison would have been $49.7 million more favorable had WYNN been able to repeat the same extraordinary luck it had last year.
Macau
VIP gamblers bet $33.5 billion (!!) at Wynn Macau’s tables during 1Q12. This is up 14.6% year on year (partly due to Wynn Macau converting some mass market tables to higher-profit VIP use). Win percentage this year was 2.59%, down 10 basis points from 1Q11’s 2.69% (the normal range is 2.7%-3.0%). Slightly worse luck in 2012 than in 2011 clipped $33.5 million from the subsidiary’s win.
together
Had WYNN had identical luck during the first quarter this year as last, revenue–and EBITDA–would have been $83.2 million higher. On such an apples-to-apples basis, EBITDA for WYNN as a whole would have been up 17% instead of down by 3.5%.
Other stuff: hotels
Macau continues to boom. Hotel occupancy is up to an extraordinary 91.3% vs. 88.6% a year ago. Room rates are up 5.5% to $324 a night.
In contrast, in Las Vegas, a city drowning in empty hotel rooms, WYNN’s push to higher room rates seems to me to have met serious resistance. The company achieved a room rate of $255 a night in 1Q12, up $5 from 4Q11 and $15 from 1Q11. But customers balked. Occupancy dropped from 85% or so, to 79.3%, yoy. Greater spending on food and entertainment by less price-sensitive customers made up for this. But my guess is that WYNN won’t be raising rates again for a while.
my thoughts
The stock is very close to its 52-week low. The PE multiple is now a reasonable 18x this year’s earnings, with, say, 15%-20% growth in prospect for 2013. In addition, about 90% of the market cap of WYNN is explained by its interest in Wynn Macau, despite the recent selloff in that equity in Hong Kong (by panicky Europeans, I think). This leaves the company’s slowly recovering Las Vegas holdings–plus its big management fees from Macau–substantially undervalued, in my view.
I’m content to hold the WYNN shares I have. At today’s prices I’d purchase LVS, 1128 or 1928 before I’d buy more.