Inside Wall Street: Win big with Wynn Resorts

As gambling stocks start to come back, it is the choice stock for Vegas and Macau recovery

By Gene Marcial Apr 19, 2013 5:25PM

It’s time to get back in the game -- gaming stocks, that is. They were pummeled last year and failed to participate in the big bull run that started a year ago. But now that equities are again under pressure, it’s one of the few groups that has become even more appealing for its potential value; they are very undervalued, as they have yet to catch up.


And gaming’s largest markets -- Las Vegas and Macau – are on their way to a recovery and are now gaining some lost ground. Industry revenues in the first quarter of 2013 easily beat modest analysts’ expectations, as the outlook for the year has brightened.

The large-caps among the global gambling stocks, such as Wynn Resorts (WYNN) and Las Vegas Sands (LVS), but among some of the more savvy investors, Wynn is the best investment bet in the besieged sector.  

Image: Four aces (© Image Source/Corbis)There’s no denying fierce competition and other short-term factors have weighed heavily on both the global and regional gambling stocks. But "despite increasing competitive dynamics in Macau and a challenging backdrop in Las Vegas, Wynn reported better than expected fourth quarter 2012 results,” notes Felicia R. Hendrix, analyst at Barclays Capital Markets, who rates the stock as overweight. Macau accounts for more than 70% of Wynn’s earnings before interest, taxes, depreciation and amortization (EBITDA).              

 

Brian McGill, analyst at Janney Capital Markets, recently upgraded his recommendation on Wynn to a buy from neutral, on expectations Macau will continue to show better growth in 2013. He has also raised his fair value for the stock to $175 a share from $120. The stock, currently trading at $127 a share, has underperformed since hitting $164 a share in the summer of 2011.

 

“We believe the existing business is essentially worth the current stock price, and that the Cotai (Macau) development is worth $50 a share,” says McGill. The risk reward is favorable at these levels, he adds, “and the existing business could see upside to EBITDA if the growth in Macau comes in stronger than we expect.” He notes that Wynn’s operations are leveraged more to the VIP sector among gamblers in Macau, which he believes “could show better-than-expected growth.”

 

In its Las Vegas operations, Wynn’s EBITDA in the fourth quarter of 2012 exceeded his expectations, notes McGill, “which is noteworthy considering the challenges in the marketplace.” The company notes a pickup in rates and occupancy at its hotels in Las Vegas, where it has 2,716 guest rooms and suites, and casinos with 147 table games and 778 slot machines. Wynn also operates 22 restaurants and food and beverage outlets and an 18-hole golf course in Las Vegas.

 

In Macau, China, Wynn operates under a 20-year concession agreement with the government -- which started in September 2006 with 600 hotel rooms and about 100,000 sq. ft. of gaming space, plus seven restaurants. Wynn is also developing a $4 billion

gambling resort in Macau’s Cotai Strip expected to open in 2016.        

 

In sum, both Las Vegas and Macau should continue to contribute to Wynn’s growth. “We see Wynn results benefiting from longer-term growth in Macau,” says Esther Kwon, analyst at S&P Capital IQ, who rates the stock as a buy. She also expects improving Las Vegas Strip fundamentals as higher-margin convention visits increase, spending by its affluent customer base continues and hotel room supply growth slows markedly after large increases in 2008 and 2009. “Longer-term, we see the development of the project in Cotai Strip in Macau as a driver for future growth,” says Kwon.   

 

The analyst figures Wynn will earn $6.32 a share in 2013 and $7.16 in 2014, up from 2012’s $4.82. Some of the large Institutional investors own big stakes in Wynn, thus reducing any concern about the stock's long-term volatility. The big holders include Waddell & Reed Investment Management, Vanguard Group, BlackRock Institutional Trust, State Street Global Advisors and Capital Research global Investors.  



Gene Marcial wrote the column Inside Wall Street for Business Week for 28 years and now writes for MSN Money’s Top Stocks. He also wrote the book "Seven Commandments of Stock Investing," published by FT Press.

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