Wynn Resorts’ 3Q12: Macau (HK:1128) flat, Las Vegas picking up, big dividend

the 3Q12 earnings report

WYNN reported earnings for 3Q12 after the market close on October 24th.

Revenues came in at $1.2985 billion, flat with $1.298billion collected during 3Q11.  Net income was $149.2 million, 12.5% higher than the $132.6 million posted in the comparable period last year.  Due to a sharp reduction in share count from 125.9 million to 100.9 million, eps showed a much sharper 41% increase, at $1.48 vs $1.05. (The shrinkage in outstanding shares is due to the forced cancellation of 24.5 million shares formerly owned by Aruze USA.)

Results exceeded the Wall Street analysts’ consensus eps estimate of $1.34.

WYNN also announced a special dividend of $7.50 a share to accompany the regular 4Q payout of $.50.  In addition, in its conference call the company said it would increase the regular dividend to $1/share, starting in 1Q13.

details

Property EBITDA (Earnings Before Interest Taxes Depreciation and Amortization) for the quarter was $402.6 million, vs $381.1 million in 3Q11.  That breaks out into $292.2 million achieved in Macau and $110.4 million in Las Vegas.

Macau

If we subtract out from Macau results the portion owned by the investing public (including me) rather than Wynn Resorts, Macau accounts for about 2/3 of WYNN’s profits.  Over the past few years, Macau has also accounted for virtually all the earnings growth WYNN has achieved.

Wynn Macau earnings are now flattish, however, for several reasons:

–an economy-related slowdown in Chinese VIP gambling

–the opening of new casinos by competitors.  If nothing else, the novelty factor draws business to the newest venues, at least for a while

–Wynn Macau is at, or near, the capacity limits of its current physical plant.

Yes, the Macau government has given 1128 permission to build a new casino in Cotai, but that’s not scheduled to open until Chinese New Year in 2016.

In the meantime, we should expect no better than growth in line with the market for the Wynn properties in Macau.  But they will continue to generate huge free cash flow for shareholders and large management fees for the parent.

Las Vegas

EBITDA in Las Vegas is up by $25.2 million, or almost 30%, vs. 3Q11.

Most of the increase comes in casino operations.  About half the casino gain is from a return of the house “win” percentage to normal from last year’s unlucky lows.  The rest is genuine improvement in the amount of money wagered in the Wynn/Encore complex.  That’s a really good sign.

the dividend

As I mentioned yesterday, WYNN is in the unusual position of generating very high free cash flows, while having no current investment projects that need them.  WYNN is certainly not going to expand in Las Vegas, which is still plagued with substantial overcapacity.  The new Cotai project won’t need a lot of money soon, and it’s going to be financed mostly with debt, in any event.  Also, in today’s ultra-low interest rate environment, it makes little sense to repay cheap borrowings (arguably, one should be adding to debt, not subtracting).

So WYNN is electing to distribute much of its excess cash to shareholders.  1128 will likely soon follow suit.

buy or sell?

I hold both WYNN and 1128.   …LVS, too.  I think LVS is the cheapest of the three, and the only one I’d buy at today’s prices.

But I’m happy to hold the other two.  The Macau gambling market will likely be considerably better next year than this, although lack of capacity will be somewhat of a drag on 1128.  Las Vegas, where WYNN has considerably more operating leverage, will continue to make progress, I think.  And, as the cliché goes, with considerable dividend income I’m being paid to wait for earnings to accelerate.

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