Although we are seeing strong consumer numbers in the U.S., the global picture in this sector isn’t too favorable. This is especially true in several key emerging markets where growth levels are slowing down and worries are starting to build over economic outlooks.
These trends are impacting a number of multinational companies, but they are hitting the casino and gaming industry very hard in particular. That is because companies in this space are seeing strong numbers from their Las Vegas segments, but are facing weakness in their international operations, and especially in the vital market of Macau.
Macau in Focus
Macau is a huge gambling center, and with the rise of China over the last few decades, its importance to the overall market has skyrocketed. In fact, the region is now easily the most important for casino companies as total gaming revenue in the territory for 2013 was close to $45 billion, or roughly seven times the figure that Las Vegas generated.
Given this reality, many casino stocks have become plays on this region of the world much more so than the Vegas Strip. And when China is facing sluggish conditions, much like it is today, this can turn into poor trading for casino stocks until Macau turns around.
A great example of this trend is Wynn Resorts (WYNN), a stock that has underperformed the broad markets as of late, and could see more pain ahead if Macau stays weak. After all, if we look to recent earnings estimate revisions, analysts aren’t too optimistic on the company’s near term future and are ratcheting down their expectations for the stock heading into 2015.
Earnings Estimates
WYNN reported a year-over-year revenue decline of 5.6% in its Macau segment, while the VIP corner of this market is down over 17% when compared to last year. And given that many do not expect this trend to reverse in the near term, we have seen some sharp declines in earnings estimates lately.
In fact, six estimates have gone lower for the current quarter (compared to one higher) in the past 30 days, while we have also seen a similar trend for the full year estimates, as five have gone lower compared to one higher. The magnitude of these revisions have also been moderate, as the current year consensus has fallen 4.5% in the last month, while the current year has fallen close to 2% as well, suggesting that the bearishness is starting to set in for this stock.
Bottom Line
Given the sluggish conditions in Macau and the recent earnings estimate revisions, WYNN is probably a stock to avoid in the near term. And given the weak overall conditions in the space, investors shouldn’t be too surprised to note that the gaming industry is in the bottom 20% of all segments, and that many stocks are poorly ranked in this space.
However, there are a few buy ranked stocks in the space and a couple could be interesting plays nonetheless. A possible choice, given the global weakness, could be Churchill Downs (CHDN) which has a Rank of #2 (Buy) right now. This stock has much more of a domestic focus than WYNN, and it could be a much better pick in what is otherwise a very shaky corner of the equity market.
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