We reaffirmed our Neutral recommendation on Wynn Resorts Ltd. (WYNN) on Nov 21, 2013 taking into account its strong third quarter results and brand position, partly offset by stiff competition.
Why the Reiteration?
Wynn Resorts reported strong third quarter 2013 results with both its top and bottom line beating the Zacks Consenus Estimate. Revenues of $1.39 billion surged 7.1% year over year driven by strong performances in both Macau and Las Vegas. Also, earnings per share of $1.84 increased 24.3% year over year as a result of top-line and profit growth.
Given the strong third-quarter results, estimates for the year largely moved north over the past 60 days. The Zacks Consensus Estimate for 2013 was up 28.5% to $6.89 per share while that for 2014 increased 6.0% to $7.30 over the same period.
Wynn Resorts is well positioned both strategically and financially. It has been able to withstand the downturn relatively well as it operates both in the U.S. and Asia. We believe that the company stands to gain market share with the slow revival of the U.S. economy and its strong brand name. Wynn Resorts is experiencing improved business in Las Vegas as leisure demand continues to improve with a gradual recovery of the U.S. economy.
Additionally, to boost performance in Las Vegas, the company has remodeled the rooms at its properties and the baccarat pit. The company foresees development opportunities in other domestic markets like Florida and Massachusetts as well.
Moreover, management is currently working on the concept of an urban Wynn in domestic markets under which it seeks to build properties in higher-priced U.S. markets like Philadelphia and Boston where room rates are very high. Management expects hotels in these markets to be well accepted due to the presence of gaming areas at the properties.
Meanwhile, Macau is the only Chinese city where gambling is legal and it is one of the largest gaming destinations in the world. The company generates over 70% of its revenues from the Macau resorts. Also, the company has embarked on a project in Cotai, Macau in order to expand its operations in the region.
The company’s cash deployment strategy reflects positive outlook and confidence in its fundamentals. However, increased hotel openings and promotional activities pose stiff competition. Excess supply, especially in the Macau market, might reduce the company’s market share.
Moreover, the company’s upcoming project in Cotai will likely face extreme peer pressure from several Chinese casino operators and Las Vegas Sands. Also, limited diversification and the challenging macro environment remain matters of concern.
Other Stocks to Consider
Wynn Resorts presently retains a Zacks Rank #2 (Buy). Other stocks worth considering in the gaming industry are Melco Crown Entertainment Ltd. (MPEL), Bally Technologies, Inc. (BYI) and Century Casinos Inc. (CNTY). While Melco Crown Entertainment carries a Zacks Rank #1 (Strong Buy), Bally Technologies and Century Casinos hold a Zacks Rank #2 (Buy).
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