Wynn Resorts (WYNN 1.66%) has seen stock appreciation of 51.20% over the past year. This has likely pleased investors. That is unless those investors have been paying attention to other resort and casino companies such as Caesars Entertainment (CZR) and Las Vegas Sands (LVS 0.82%), which have seen stock appreciation of 203.7% and 67.31% over the same time frame. The Las Vegas Sands move appears justifiable because of the company's consistent top-line growth. Caesars Entertainment's move is primarily based on the company's future online potential, not its actual results.
Geographic diversification
Every resort and casino company wants to be in Macao, but not every company has been able to squeeze its way in. While Wynn Resorts and Las Vegas Sands have established their presence in Macao, Caesars Entertainment has failed to do so despite a strong attempt. This has led to Caesars Entertainment lagging its peers on the top line over the past year:
CZR Revenue (TTM) data by YCharts
This, in turn, has led to Caesars Entertainment falling short on the bottom line as well:
WYNN EPS Diluted (TTM) data by YCharts
While Las Vegas Sands has been the most impressive on the top line, Wynn Resorts has still shown growth and it has also been steady on the bottom line.
In the third quarter, Wynn Resorts saw its Macao Operations revenue jump 10.1% year over year, primarily thanks to stronger table game profits. This segment also performed well in other areas with the average daily room rate moving to $310 versus $307 in the year-ago quarter, the occupancy rate at 95.8% versus 94.2% in the year-ago quarter, and REVPAR, or revenue per available room, at $297 versus $289 in the year-ago quarter.
Wynn Resorts also grew its Las Vegas operations, with revenue increasing 3.9% primarily thanks to its table games win percentage. However, just as in Macao, Wynn Resorts has also performed well on the resort side with the average daily room rate moving to $250 from $244, the occupancy rate at 87.9% from 85.7%, and REVPAR at $220 from $209.
Up until this point, there has only been reason for optimism. However, these are past results, and only the future counts.
Future plans and potential implications
Wynn Resorts is currently in the process of building Wynn Palace in the Cotai area of Macao. Wynn Palace will have 1,700 rooms, a performance lake, meeting space, a casino, a spa, retail shops, food and beverage outlets, and the high-end ambiance you would expect from any Wynn property. Wynn Palace is expected to be completed in the first half of 2016. Here's the catch: at a cost of $4 billion.
The "B" word is often thrown around with frightening comfort these days, but $4 billion is a massive investment for a company with a market cap of $16.41 billion. If this doesn't go as planned, Wynn Resorts is going to find itself digging out of a deep hole for a long period of time. Currently, Wynn Resorts has $2.19 billion in cash versus $6.21 billion in long-term debt. It also generated $1.48 billion in operating cash flow over the past year. However, much of that cash flow must go to capex for current operations and capital returns to shareholders, including a 2.50% yield.
In addition to Wynn Palace, Wynn Resorts has applied for a gaming license in Massachusetts. If approved, any new plans would require significant capital investments. Wynn Resorts doesn't plan on stopping there. It's also looking at other international locations for geographic diversification.
The potential dilemma is simple. Wynn Resorts is assuming (or hoping) that the economy will continue to grow. However, if there are any steep setbacks, especially with financial markets since Wynn Resorts relies mostly on discretionary spending from high-end consumers, then Wynn Resorts will find itself in a precarious situation.
If you're looking for a resort and casino company with a strong fiscal position, then you might want to look at Las Vegas Sands. While it also sports a negative balance sheet with $3.21 billion in cash versus $9.76 billion in long-term debt, it generated $4.05 billion in operating cash flow over the past year. It also yields 2%.
Caesars Entertainment doesn't fall into the "fiscally strong" category. It's highly leveraged, with $1.71 billion in cash versus $21.54 billion in long-term debt. It also generated negative cash flow of $287.40 million over the past year.
The bottom line
All three of the above companies rely heavily on discretionary spending. While these stocks have been performing well, we're not currently living in an economic environment that's likely to lead to increased discretionary spending in the near future. As far as Wynn Resorts goes, momentum is strong at the moment and that might continue, but excessive opulence has never shown unhindered, sustainable growth.
