On Jan 17, Zacks Investment Research downgraded Wynn Resorts Ltd. (WYNN) to a Zacks Rank #5 (Strong Sell).
Wynn Resorts has been witnessing persistent downward estimate revision over the last 30 days due to soft revenues in Macau since Jun 2014 and bleak revenue outlook for Jan 2015. This leading casino operator is highly exposed to the troubled Macau region which contributes a major portion of its revenues. Therefore, any negative movement in this region sends stock prices crashing.
Why the Downgrade?
Macau is a huge gambling center, and with the growth of the Chinese economy over the last few decades, its importance for the overall market has skyrocketed. In fact, this is currently the most important region for casino companies.
However, gambling revenues in Macau have been declining over the past seven months due to lower traffic. After declining in single digits for three consecutive months beginning Jun 2014, revenues declined 11.7%, 23.2%, 19.6%, 30% in September, October, November and December, respectively.
As a result, gambling revenues declined 2.6% year over year in 2014. According to analysts, gambling revenues in Macau — the only destination in China where gambling is legal — registered the first annual drop since casinos were liberalized in 2001.
The slump reflects a slowdown in Macau as a result of high-stake gamblers curtailing spending amid a cooling Chinese economy. Also, the nationwide crackdown on corruption in China compelled Macau officials to impose restrictions on high rollers to stop billions of dollars from being siphoned off illegally from mainland China to Macau. Meanwhile, political unrest, a smoking ban on mass market gaming floors and pro-democracy demonstrations in Hong Kong have added to the woes.
All these have reduced footfall at Macau casinos, thereby hurting Wynn Resorts’ results. Owing to this, Wynn Resorts lost 31% since the beginning of Jun 2014 when the region started facing troubles. Unfortunately, the worst is not over and gaming revenues for January are expected to decline in double digits again, per most of the analysts.
Further, Wynn Resorts is reportedly facing hurdles for building a casino resort worth $1.6 billion at the Everett waterfront for which it received the license in Sep 2014 from the Massachusetts Gaming Commission. However, Somerville, MA recently filed a lawsuit requesting the state court judge to invalidate the license. Per the filing, regulators should have disqualified the company for license or at least abandoned its proposed site after it was found that a convicted felon had a financial interest in the land deal.
Stocks to Consider
Better-ranked stocks in the same industry include Isle of Capri Casinos, Inc. (ISLE), Boyd Gaming Corp. (BYD) and Zynga, Inc. (ZNGA). While Isle of Capri carries a Zacks Rank #1 (Strong Buy), Boyd Gaming and Zynga sports a Zacks Rank #2 (Buy).
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