Can Las Vegas Handle Another Billion-Dollar Resort?

The Las Vegas Strip is about to be transformed again, this time by one of Asia's largest gaming companies, Genting Group, which in March purchased the unfinished resort formerly known as Echelon from Boyd Gaming.

Genting plans to spend $4 billion to build a resort on the Las Vegas Strip's north end, catercorner from Wynn Resorts (NASDAQ: WYNN  ) . Phase one is scheduled to open in 2015, and as long as the company can get a gaming license, I don't see why it wouldn't begin construction.  

The challenge for operators in Las Vegas is that supply already outstrips demand. MGM Resorts (NYSE: MGM  ) and Caesars Entertainment (NASDAQ: CZR  ) are still reporting quarterly losses because of high debt loads and slow growth in Las Vegas. Las Vegas Sands (NYSE: LVS  ) and Wynn are helped by most of their revenue coming from Macau, but Las Vegas hasn't been very impressive recently for either company.

Can Las Vegas really handle another megaresort? Let's look at the numbers and see how much Las Vegas needs to grow just to break even.

Balancing supply and demand
Below, I've provided the gaming and nongaming revenue of Wynn Resorts and Las Vegas Sands in Las Vegas. Both companies operate large properties near where Genting wants to build Resorts World Las Vegas. If Las Vegas is going to handle a new resort, it will need to grow enough to handle another Wynn Las Vegas or The Venetian/Palazzo Las Vegas complex.

 

Gaming Revenue (TTM)

Non-Gaming Revenue (TTM)

Wynn Resorts 

$661.0 million

$1.1 billion

Las Vegas Sands 

$521.0 million

$919.2 million

Las Vegas Strip 

$6.33 billion

N/A

Source: Company earnings releases and Nevada Gaming Commission.

If we assume that the Las Vegas Strip will need to grow 10% just to break even by 2017 on the addition of Resorts World Las Vegas, the region would need to grow gaming 2.4% annually. But over the past 12 months gaming has grown just 2.1%, while growth was just 2.3% last year.

Taking a hit won't be a big impact to Wynn or Las Vegas Sands, but if the Las Vegas Strip needs to grow 2.4% annually just to break even, it will have a huge impact on MGM and Caesars. They can't make money as it is right now, and they would like any growth to flow to their bottom line.

Foolish takeaway
I don't think Las Vegas is doomed if Genting builds Resorts World Las Vegas, but it certainly limits upside for MGM and Caesars in the region. Considering that regional gaming is struggling as well, Caesars has the most to lose of anyone.

This is just another reason investors should keep their gaming dollars focused squarely on growth in Asia and Macau.

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Read/Post Comments (5) | Recommend This Article (13)

Comments from our Foolish Readers

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  • Report this Comment On December 21, 2013, at 11:30 AM, blackjackkid wrote:

    The US economy will be growing much stronger next year so I would bet on MGM (especially with MGM securing the MD license yesterday) and CZR to beat LVS and WYNN performance-wise once again just like they did this year. CEO James Murren of MGM has already said 2014 will be a banner year for Las Vegas due to rising convention business. I'm also looking forward to internet-gambling expanding to more states next year which will also benefit domestic players like CZR and BYD, and to a lesser degree MGM.

  • Report this Comment On December 21, 2013, at 2:34 PM, Oneolddude wrote:

    I think they should go with the Italian theme like the Venetian. Call it the Napoli. Guests would enter the resort by walking by huge piles of trash left to rot....

  • Report this Comment On December 22, 2013, at 3:25 PM, whyaduck1128 wrote:

    Every time one of these resorts is proposed, the Cassandras issue their gloom-and-doom reports about how Vegas can't handle the addition. So far, each prediction has been wrong--for several generations.

    I suppose that if they predict the same thing enough times, they'll be right, but that's no proof that they know what they're talking about.

    I think that Genting knows its business, based on what little I know about their Asian operations. If they think they can make sufficient profit in Vegas, I believe them.

    And if MGM and Caesars can't handle the competition, well, that's the law of the jungle in effect. Survival of the fittest. Their properties wouldn't disappear; they'd just be sold to someone who would know how to make them profitable.

  • Report this Comment On December 23, 2013, at 1:12 PM, spokanimal wrote:

    The corporate intersection where accounting, promotion, and development all meet is generally draped in the "intangibles" of the business. Although I don't teach the classes that emphasize it, I took them in the past and all of my students get exposure to them en route to their CFAs.

    Accountants focus their attention on goodwill, it's value, and it's amortization. The calculation of EBITDA factors heavily into siphoning out it's value.

    But a CFA worth his salt will translate the concepts of goodwill and marketing into a development plan that often goes un-appreciated by most folks, including this author.

    Spain was a loser in the eyes of an accountant ahering to Adelson's 20% return mandate, but to a "marketer" it was geographic triangulation of VIPs who frequent LVS's jets, and a familiar and desirable presence of LVS for an oil-rich, Saudi prince who would like a taste of Macau's VIP suites in a closer, and more familiar dig.

    In an intangible sense, a 4 or 5 star Vegas presence offers "legitamacy", a illustrates as much as a Singapore I.R. does that you "belong" in the pole position in Japan. Even with Vegas' margins a fraction of those at the SCL subsidiary, Japanese authorities are going to care just how much you're ferrying their biggest punters into sin city. LVS's chinese business percentage illustrates just how they use their jets to stay above the Center-strip fray, and on the minds of any big-city mayor who wants to use a couple of I.R.s to gun their tourism 40-plus percent in 3 years time as Singapore did.

    So as I read a piece like this with one ear, while listening to people grouse about how un-profitable Eurovegas would have been with the other...

    ... I long ago learned to look past these people's obsession with numbes, and into the realm of how intangibles are often what makes, or breaks, a company over the long haul.

    Spokanimal

  • Report this Comment On December 23, 2013, at 6:50 PM, FortunesFormula wrote:

    spok,

    Summed up as follows:

    There are lies, damned lies and statistics.

    Mark Twain

    FF

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