NEW YORK (TheStreet) -- Wynn Resorts (WYNN) , controlled by Las Vegas billionaire Steve Wynn, has been operating its Macau resorts for over eight years and plans to open Wynn Palace by the second half of 2016.
The company's operations in Chinese-controlled Macau accounts for most of Wynn Resorts' revenue: In the past quarter, Macau's revenue were 68% of Wynn Resorts' total sales. But the recent slowdown in the progress in Macau's operations has investors wondering why it wants to invest in another casino and resort on this peninsula.
In the past quarter, the company's growth in revenue in its Macau's resorts rose by only 3.2%. In comparison, during the first quarter the company's revenue from its Macau's operations grew by 14.2% and its operating profits by 16.2%.
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Its revenue from Las Vegas operations grew by 12.5%, year on year. Moreover, the operating profit margin in Vegas reached 35.5%, while Macau's profitability was 32%. This means, the company's core business in Vegas is turning a higher profit and grows faster than its Macau's operations.
Even though the company was able to reach analysts' expectations on its second-quarter earnings, this was mostly due to the sharp rise in Wynn's profits in Vegas.
Analysts recently cut their 2014 outlook on Macau's casino revenue from 9% to 6%. This lower forecast suggests Wynn Resorts will see low growth in revenue in the coming quarters in it Macau operations.
There is also risk from Macau's investigation of the company's 2012 land deal that paved the way for the $4 billion Wynn Palace casino-resort.
At $202, shares of Wynn Resorts are up 4.2% for the year to date compared with the S&P 500 index, up over 7% for the same period. Wynn Resorts' forward P/E is at 21.9. By comparison, the Hotel/Gaming sector P/E is 30.84. One of the company's rivals, Las Vegas Sands (LVS) has a lower forward P/E at 16.33.
Moreover, Wynn Resorts' enterprise value-to-EBITDA ratio is at 13.77; this is slightly lower than the average Hotel/Gaming sector ratio of 14.1. Las Vegas Sands has a lower ratio of 12.5. This means, Wynn Resorts' current valuation is higher than Las Vegas Sands but is slightly lower than the sector's average.
Wynn Palace will be a 1,700-room hotel and casino. The company's current two assets, Wynn Macau Resort and Encore at Wynn Macau, have a total of 1,014 rooms. So the new resort will hold 70% more rooms than the two existing hotels have combined. The current expectations are construction of the new hotel will cost $4 billion -- presuming the Macau's corruption agency investigation doesn't put the enterprise on hold.
Other leading casino companies such as Las Vegas Sands have also expanded their reach in Macau, so Wynn Resorts is likely to face stronger competition in the coming years. The stronger competition and slower growth could bring further down Wynn Resorts' profit margins.
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If Macau's growth continues to slow, this could have a negative impact on Wynn Resorts' operations and could reduce the rate of return on its Wynn Palace investment.
TheStreet Ratings team rates WYNN RESORTS LTD as a Buy with a ratings score of B-. TheStreet Ratings Team has this to say about their recommendation:
"We rate WYNN RESORTS LTD (WYNN) a BUY. This is driven by several positive factors, which we believe should have a greater impact than any weaknesses, and should give investors a better performance opportunity than most stocks we cover. The company's strengths can be seen in multiple areas, such as its notable return on equity, revenue growth, solid stock price performance, impressive record of earnings per share growth and compelling growth in net income. We feel these strengths outweigh the fact that the company shows weak operating cash flow."
Highlights from the analysis by TheStreet Ratings Team goes as follows:
- Compared to other companies in the Hotels, Restaurants & Leisure industry and the overall market, WYNN RESORTS LTD's return on equity significantly exceeds that of both the industry average and the S&P 500.
- The revenue growth came in higher than the industry average of 5.4%. Since the same quarter one year prior, revenues slightly increased by 6.0%. Growth in the company's revenue appears to have helped boost the earnings per share.
- Powered by its strong earnings growth of 56.25% and other important driving factors, this stock has surged by 44.27% over the past year, outperforming the rise in the S&P 500 Index during the same period. Regarding the stock's future course, although almost any stock can fall in a broad market decline, WYNN should continue to move higher despite the fact that it has already enjoyed a very nice gain in the past year.
- WYNN RESORTS LTD reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, WYNN RESORTS LTD increased its bottom line by earning $7.17 versus $4.81 in the prior year. This year, the market expects an improvement in earnings ($8.60 versus $7.17).
- The net income growth from the same quarter one year ago has significantly exceeded that of the S&P 500 and the Hotels, Restaurants & Leisure industry. The net income increased by 57.1% when compared to the same quarter one year prior, rising from $129.79 million to $203.91 million.
- You can view the full analysis from the report here: WYNN Ratings Report