Category Archives: Casinos

reason six why analysts mis-estimate company earnings

July 25, 2011 By in Casinos, earnings surprise, Entertainment, Industry Analysis, internet, reasons analysts mis-estimate company earnings, Technology, using research, Wireless Tags: , , , , , , , , , , Leave a comment

reason #6

In my post from yesterday, I titled this reason “making dumb mistakes.”  I’m not sure what else to call it.  Let me illustrate with two examples of recent huge misses by analysts who should have known better.  They’re the June quarter results from two high-profile companies with plenty of Wall Street coverage, WYNN and AAPL.

Let’s take WYNN first.

WYNN’s 1Q2011

In 1Q2011, WYNN earned $173.8 million, or $1.39 per fully-diluted share.  Look one line higher on the income statement, and you see that the $173.8 million figure is after deducting $52.5 million in “income attributable to non-controlling interests.”  That’s minority interest.  It’s income that belongs to the 27.7% of Wynn Macau that WYNN doesn’t own.  (Wynn prepares its financials as if it owned 100% of Wynn Macau, and then subtracts out the minority interest at the end.)

From the minority interest figure and the magic of long division, you can calculate ($52.5 /.277) that Wynn Macau’s total net income was $190 million. WYNN’s share was $137 million.  Therefore, WYNN, ex its interest in Wynn Macau, earned $36.8 million for the quarter.

One unusual feature of 1Q11:  gamblers at the WYNN tables in Las Vegas had bad luck by historic standards during the quarter.  They lost a bit over 30% of what they wagered vs. historical loss experience of 21%-24%.

Any analyst who follows the company could have found all this out in five minutes of studying the 1Q11 income statement.  Given that the analysts’ consensus for 1Q11 was wildly low at $.73, you’d assume they’d do so to try to figure out where they went so wrong.

turning to 2Q11

In 1Q11, 80% of WYNN’s income came from fast-growing Macau, 20% from slowly-recovering Las Vegas.

From figures the Macau government posts monthly on its Gambling Coordination and Inspection Bureau website, we knew on July 1st that gambling revenue for the market as a whole was 12% higher in 2Q11 than in 1Q11.  If we assume that Wynn Macau grew in line with the market, and that a 12% increase in revenues produced an 18% jump in income (basically, adjusting for normal operating leverage and the fact that Wynn Macau “adds” gambling capacity by raising table stakes), then Wynn Macau would have earned about $225 million in 2Q11.  Of that, WYNN’s share would be about $165 million.  That translates into around $1.35 a share for WYNN in eps during the quarter.

What about Las Vegas?  It chipped in $.25 a share to first quarter earnings.  “Luck” at table games returning to historical norms would probably push that figure back to zero.  On the other hand, room rates at both Wynn and the Encore are gradually rising, so zero might be too low.  But let’s stick with zero from Las Vegas is the most reasonable guess.

In other words, a sensible back-of-the-envelope guess for WYNN’s eps in 2Q11 would be $1.35 + $.00  =  $1.35.  This isn’t necessarily the most conservative forecast, but it is one based on factual data about the Macau gambling market and the assumption that nothing much goes wrong (or right) in Las Vegas.

What did the professional analysts say?

The median estimate was $1.01.  The highest was $1.25; one analyst had the dubious distinction of saying eps would be $.69.  For this last estimate to have come true, WYNN would have had to break even in Las Vegas (it earned about $.25/share) and to have revenues in Macau drop by 25% quarter on quarter, while the market was growing at 12%.

Given that WYNN’s results are so strongly influenced by Macau, even the median was predicting a relative disaster for the company there.  What were they thinking?

(True, they might have been assuming a disaster in Las Vegas, not Macau.  And, I’ll admit, I thought WYNN has done surprisingly well in Las Vegas so far this year.  But Las Vegas isn’t big enough to move the eps needle down to $1.  And the situation is a little more complicated than I sketched out above:  Wynn Macau pays a large management and royalty fee to the parent, almost $40 million in 2Q, so the better Macau does, the better ex Macau looks.)

APPLE

AAPL’s 2Q11 (ended in March)

During 2Q11, AAPL earned a profit of $6.40 a share.  Its business broke out as follows:

Macs     3.76 million units     $4.98 billion in revenue

iPod      9.02 million units     $3.23 billion (includes iTunes)

iPhone     18.6 million units     $12.3 billion

iPad     4.7 million units     $2.84 billion

Other                                         $1.3 billion

Total                   $24.7 billion

turning to 3Q11

Let’s try a back-of-the-envelope forecast for AAPL’s 3Q11.  To make things ultra-simple, we’ll ignore operating leverage, which will bias our estimate to the low side.

Macs  growing, but slowly in a developing world where overall PC sales are flattish.  Let’s say $5 billion in sales.

iPod  flat, $3.2 billion in sales

iPhone     industrywide smartphone unit sales are growing at 80% year on year.  All the growth is coming from half the market, Android and iPhone, with Android growing faster; Nokia and RIM are taking on water and sinking fast.  Let’s pencil in 19 million units at $660 each = $12.5 billion.

iPad  this is the tricky one.  We know that AAPL is capacity constrained, is adding manufacturing capacity as fast as it can, and sold 4.7 million units in 2Q11.  Let’s put in 6 million units at $600 each, the average price from 2Q11.   That’s $3.6 billion.

Other Leave it flat at $1.3 billion.

Add all these numbers up, and we get $25.6 billion.  If we assume constant margins–i.e., no operating leverage (which a really terrible example to set–working with margins instead of unit costs, but I’ll do it anyway), then earnings will come in at $6.60-$6.75 a share for the quarter.

As events turned out, my guess is way too low.    …oh well!   AAPL reported eps of $7.79.  The big difference?  The iPad sold 9.2 million units and brought in $6 billion in revenue.  That alone adds more than $.60 a share in earnings.  The rest is bits and pieces.

So I missed badly.  That’s not really the point.  The real question is how my ten-minute approach stacks up against the work of the 45 professional analysts who follow the company for a living–and for whom AAPL is probably their most important stock.  Check them out and I’m starting to look pretty good.

the analysts

The median estimate of the 45 was $5.82 a share.  The low was $5.10, the high $6.58.

How could they consensus be projecting an almost 10% quarter on quarter drop in earnings?

APPL’s main business, smartphones, which accounts for 50% of total company revenue, and a higher proportion of profit, is exploding. The category is growing by 80%.  Rivals NOK and RIMM are not only going nowhere, they’re getting worse by the day.   In fact, NOK’s smartphone sales in the June quarter fell year on year–probably by a third. So AAPL’s continually taking market share from them.  Quarter on quarter sales were likely up.

We don’t know what 2Q11 iPad revenues could have been, only that they flew off the shelves as fast as AAPL put them on.  So product sales had to be up, maybe substantially, in 3Q11.

If both iPhone and iPad were flat, quarter on quarter, the only way to get company results to be down 10% would be if Mac sales, which represent about a fifth of the company’s business, were cut in half.  Hard to fathom, given that the PC industry is growing, if only slightly, and Macs have been gaining significant market share from Windows-based PCs.

what did I do differently?

I think everybody ignored AAPL’s “guidance” of $5.03.  WYNN doesn’t give guidance.

I did five things:

I gathered industry information from the internet.

I read the prior-quarter results carefully.

I used a line of business table to make (very primitive) quarter on quarter projections.

I ignored macroeconomic forecasts of slow growth for the US, since both firms target the affluent here–AAPL more so than WYNN, I think.

I didn’t worry about missing on the high side.  I didn’t want an estimate that was deliberately too conservative.

What didn’t the analysts do?

I only have guesses.

It’s possible that they were influenced by downbeat general economic news.  Even so, I don’t see how you could have gotten to the consensus figures for either APPL or WYNN if you did a line of business table.  But that’s one of the first lessons in Security Analysis 101.  Maybe the analysts in question were out that day.

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

July 19, 2011 By in Asian economic development, Casinos, China, Current Market Thoughts, earnings conference calls, economics, Entertainment, Hong Kong, Industry Analysis, Recent Market Action, Stock ideas Tags: , , , , , , , , , , Leave a comment

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.

Macau

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.

Macau gambling results: June 2011

July 3, 2011 By in Casinos, China, emerging markets, Entertainment, Hong Kong, Industry Analysis, Recent Market Action, Stock ideas, Trading Tags: , , , , , , , , , , , Leave a comment

The Macau Gambling Inspection and Coordination Bureau reported the June 2001 gambling win for the SAR’s casinos prior to the opening of New York trading on July 1st.

The numbers, in millions of patacas:

Monthly Gross Revenue from Games of Fortune in 2011 and 2010
Monthly Gross Revenue Accumulated Gross Revenue
2011 2010 Variance 2011 2010 Variance
Jan 18,571 13,937 +33.2% 18,571 13,937 +33.2%
Feb 19,863 13,445 +47.7% 38,434 27,383 +40.4%
Mar 20,087 13,569 +48.0% 58,521 40,951 +42.9%
Apr 20,507 14,186 +44.6% 79,028 55,137 +43.3%
May 24,306 17,075 +42.4% 103,334 72,211 +43.1%
Jun 20,792 13,642 +52.4% 124,126 85,853 +44.6%

Source:  Macau Gambling Inspection and Coordination Bureau

June was the first month in 2011 when market winnings exceeded those of the same period of 2010 by more than 50%.  The monthly take was the second-highest in the history of the SAR, exceeded only by May 2011–when results were aided by the Golden Week holiday.

The bullish GICB report seems to me to be behind the sharp rise on Friday in the price of the US parents of Macau gambling stocks–WYNN, LVS and MGM.

The case of the Hong Kong-traded subsidiaries, Wynn Macau (1128), Sands China (1928) and newly-listed  MGM China (2282), is a little more complicated.

1128 and 1928 have been correcting since early May, despite news of the extremely strong Golden Week results, as Hong Kong investors rotated toward locally-controlled, more mass market-oriented (and operationally weaker) casino operators. MGM China joined the other two almost the moment it IPOed.   The relative underperformance of the WYNN, MGM and LVS subsidiaries appears to have ended about a week ago, perhaps in anticipation of the June GICB report.

Trading in 1128, 1928 and 2282 over the next few days will be interesting to watch, the main question being the multiple that the market is willing to award to these shares.

In very simple terms, a 40%+ increase in yearly revenues will likely translate into a 60%+ increase in profits.  For, say ,1128. that would imply 2011 eps of HK$1.35-$1.40 (my guess is that the actuals will be higher, but then I own 1128, WYNN and LVS shares).  Wynn Macau peaked at 20x eps before falling by about 20%.  It seems to me that 20x isn’t particularly generous for the kind of growth this industry is exhibiting.  Will 1128 be able to exceed that multiple in the current rally?

MGM China (HK:2282) came public on June 7

June 20, 2011 By in Asian economic development, Casinos, China, earnings conference calls, economics, emerging markets, Entertainment, Hong Kong, Industry Analysis, Stock ideas Tags: , , , , Leave a comment

the IPO price

The offering price for the 760 million shares in the offering was HK$15.34, at the absolute high end of the range of HK$12.36 -HK$15.34 determined by the Hong Kong Stock Exchange..

a secondary offering

As I’ve written in more detail in other posts, this IPO is unusual in that it does not involve the sale of primary shares (ones newly issued by the company).  Rather, it’s a secondary offering.  That is, all the shares being sold to the public come from the already-existing holdings of company equity holders.  In this case, the sole seller is Pansy Ho, who owned 50% of MGM China before the sale.

fundamentals

According to the offering documents, MGM China lost money in 2008 and 2009.  It earned HK$1.566 billion last year.  It projects that at a minimum it will have a profit of HK$1.4501 billion for the six months ending June 30, 2011.  This would equate to eps of $.38 per share.

Let’s assume MGM China earns $.80 a share for the full year of 2011.  The offering price would then represent a multiple of 19x current year earnings per share.  When the offer’s pricing range was being set in mid-May, a 19x multiple represented parity with, or perhaps a slight premium to, the multiple investors were awarding to Wynn Macau (HK: 1128), the company I regard as the market leader–and the highest multiple casino stock on the Hong Kong exchange.

early price action

After trading briefly above the offering price, 2282 ended its first day trading at HK$15.16, on volume of a tad below 77 million shares.  It closed overnight in Hong Kong at HK$13.12, or about 14% below the IPO level.

I don’t regard this decline as particularly surprising, since the entire casino sector in Hong Kong has under gone a sharp correction that began in early May (Wynn Macau, for instance, is now trading at about 15x earnings).  What’s more noteworthy is the investment bankers’ ability to get the MGM China issue off at an unusually high price.

my take on the stock

I haven’t seen any sell-side research on MGM China.  The offering documents suggest, however, that the sales pitch for the company is that it represents a blending of the best of East and West–the local market knowledge and connections of Ms. Ho and the technical know-how about glitzy upmarket gaming of MGM Resorts International, which now has a controlling 51% interest in MGM China.  There’s a whole laundry list of related-party transactions between Ms. Ho and 2282 in support of this idea.  The documents do refer to the regulatory problems Ms. Ho has encountered in the US.  But they point out that she has never formally been declared to be “unsuitable” to hold a casino license in the US–although MGM appears to have ceased operating in Atlantic City to avoid this result.

I’m not sure the synergies the market seems to expect will work out.  It’s not 100% clear to me how Ms. Ho will balance her obligations to MGM China with those to the much larger Ho family-controlled rival, SJM.  I’m also not convinced that many talented Las Vegas executives will want to link their fortunes to the Ho family.

Whatever qualms I may have about the Ho family connection, however, MGM and the Hong Kong market–where the price of MGM China shares will ultimately be decided–appear to have none.  In addition, the Macau gaming market appears to me to be still in the rapid growth phase where the rising tide lifts all boats.  So I suspect that despite the fact I won’t be a shareholder the stock will be an above average performer in the Hong Kong market from this point on.

Macau gambling market results: another record high in May 2011

June 3, 2011 By in Casinos, China, Current Market Thoughts, emerging markets, Entertainment, Hong Kong, Industry Analysis, Portfolio management, Stock ideas, Strategy Tags: , , , , , , , , , , Leave a comment

The Macau Gaming Inspection and Coordination Bureau reported on June 2the monthly win for the SAR’s casinos during May 2011..  As the table below shows, thanks both to a successful Golden Week and to the opening of new venues, the take was a record $24.3 billion patacas, almost 20% ahead of the previous record posted just the month before, in April.


Monthly Gross Revenue from Games of Fortune in 2011 and 2010     MOP millions
Monthly Gross Revenue Accumulated Gross Revenue
2011 2010 Variance 2011 2010 Variance
Jan 18,571 13,937 +33.2% 18,571 13,937 +33.2%
Feb 19,863 13,445 +47.7% 38,434 27,383 +40.4%
Mar 20,087 13,569 +48.0% 58,521 40,951 +42.9%
Apr 20,507 14,186 +44.6% 79,028 55,137 +43.3%
May 24,306 17,075 +42.4% 103,334 72,211 +43.1%
 Source:  Macau Gaming Inspection and Coordination Bureau

The biggest winner during the month  appears to have been Galaxy Entertainment, which opened a giant new casino, the Galaxy Macau in Cotai, around mid-May.  The largest market share loser seems to have been Wynn Macau.

Reaction by Hong Kong investors to the May record  has, so far, been muted.  Several reasons why:

–There have already been a series of months of 40%+ year on year gains in casino win recently; the fourth no longer carries the same positive surprise value that the first did.

–MGM is meeting with investors as part of its IPO process, and other publicly traded Macau casino companies have been presenting at investor conferences.  So the news of a strong Golden Week and the expansion of the market due to the Galaxy Macau has already been disseminated.

–I think we’re reaching, at around 20x current year results, the limits of the price-earnings multiple expansion that the Hong Kong market is willing to permit for Macau casino stocks.  Unless/until the market changes its mind, it seems to me that no stock will trade at more than 20x, no matter what current profit growth may be.  If so, the stocks will either tread water, or move simply in line with the market, until investors begin to discount 2012 prospects.