You may be surprised to find out that Wynn Resorts (WYNN -1.72%), not Las Vegas Sands (LVS -0.36%) or Melco Crown (MLCO), has been the best-performing big gaming stock in the past year.
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Wynn's conservative balance sheet, focus on high-end players, and growth potential also make it one of the most attractive stocks in gaming today. While there is no guarantee the stock will move higher, here are the top three reasons the stock could climb in coming years.
Expansion onto Cotai
Steve Wynn made a good move for shareholders when he built his first resort in Macau, but he wasn't as bullish on the market as Sheldon Adelson at Las Vegas Sands, which meant he missed out on an early move to Cotai.
In today's Macau, Cotai is the new gaming district that is capturing the high-margin mass market as well as VIP players as glitzy new resorts are built. If we were to compare it to Las Vegas, Cotai is the Las Vegas Strip and the Macau Peninsula is like Downtown Las Vegas.
But Wynn is finally building a resort on Cotai and when it potentially opens in 2015 or 2016 it will most likely be the most profitable he has ever built. Plans are for 1,700 hotel suites, 500 gaming tables, a performance lake, and many other attractions.
Wynn and Encore Las Vegas. Source: Wynn Resorts.
The impact on Wynn's financial results should be enormous. Wynn and Encore on the Macau Peninsula made $1.4 billion in EBITDA, a proxy for a casino's cash flow, over the past year and Cotai should perform better than that. For a comparison, Las Vegas Sands' The Venetian Macau generated nearly $1.5 billion in EBITDA over the past year and by the time Wynn Palace in Cotai is completed I wouldn't be surprised to see EBITDA approach $2 billion annually for that resort alone.
Expansion in Asia
Macau has driven growth for Wynn and many competitors over the last few years but it isn't the only location Steve Wynn hopes to build. Singapore has two gaming concessions, one held by Las Vegas Sands, and has discussed opening up to more concessions after 2017. But the market everyone really has their eyes on short-term is Japan.
Officials in Japan have been talking for years about opening up gaming to a small number of megaresorts, but with the 2020 Olympics fast approaching there's some urgency to a bill. If gaming is legalized, Wynn Resorts would be one of the main bidders and it's a huge opportunity. CLSA Ltd. has estimated that Japan could be a $40 billion annual gaming market if it does open up and if Wynn wins a bid there it would be a huge boost to the stock.
Return of Las Vegas
The final reason Wynn Resorts stock could rise is Las Vegas. At this point, the company's Las Vegas properties only account for about a quarter of Wynn's EBITDA so it's not a majority of the business, but trends in Las Vegas are moving toward Wynn.
A majority of Wynn's cash flow now comes from Macau. Source: Wynn Resorts.
Not only does Wynn have the most profitable resort on The Strip, it is located on the north end that will soon have new properties from Genting Group and James Packer. That will help draw customers to that end of The Strip and bring more revenue to Wynn.
The other good news is that Las Vegas is just now reaching the gaming revenue highs seen before the recession ravaged the region. There's still room for gaming revenue to go higher and as it does it will be a direct impact on the bottom line and could push Wynn's stock higher.
Whereas Cotai and Japan would be game-changers for Wynn, Las Vegas is more of an incremental benefit. But don't discount its importance because it's still the heart of Wynn Resorts' empire.
Foolish bottom line
If you have a long-term time horizon I think Wynn Resorts will do very well because the Asian gaming market is just now being tapped and there are tremendous growth opportunities in Macau and Japan. But an enterprise value/EBITDA ratio of 12.9 makes Wynn one of the most expensive stocks in gaming today so a lot of good news is priced in.
I'm not selling shares I own but I'd be more of an optimistic buyer on dips in the stock than an aggressive buyer at the current price. A lot has to go right for Wynn to be a great performer and investors would be wise to buy a little lower to factor in some of the risks in the business.
