The gaming industry in Asia has been hot for the past decade and Wynn Resorts (WYNN -1.16%) has been one of the major beneficiaries of the industry's growth. But recently, Macau's gaming market has slowed and investors are worried it's a sign of things to come for gaming companies there.
While there's no guarantee that a stock will rise or fall and despite these issues, below I'll answer why I think Wynn Resorts is still a stock gaming investors want to own.
Wynn Las Vegas is the most profitable resort on The Strip. Source: Wynn Resorts.
A business that pumps out cash
What investors are getting with Wynn Resorts is one of the most consistent and profitable companies in the gaming industry. Steve Wynn's focus on the high end consumer and non-gaming attractions result in less volatility than competitors and he typically employs less leverage in the business as well (although Macau's success has reduced debt at competitors).
In the last year, Wynn Resorts has generated $5.8 billion in revenue, $1.85 billion in EBITDA, and $826.7 million in net income. Those are the result of owning the most profitable resort in both Las Vegas and Macau. The high margin these properties generate not only provides leverage when revenue increases, it provides a cushion to fund operations if revenue falls.
Wynn has tremendous growth opportunities
The profitable business Wynn Resorts runs today is about to get a lot more profitable. Steve Wynn is currently building his crown jewel in Wynn Palace on Cotai in Macau, a 1,700 hotel room resort with a 500-table casino, performance lake, retail, and all of the amenities we've come to expect from Wynn. The project, seen in a rendering below, is expected to cost $4 billion and be completed in the first half of 2016.
Rendering of Wynn Palace on Cotai in Macau. Source: Wynn Resorts.
What's exciting about the development for investors is the potential return this resort will have. Wynn's property on the Macau Peninsula generated $1.39 billion in EBITDA over the past twelve months and the Cotai property should exceed that by a wide margin.
For comparison sake, Las Vegas Sands' The Venetian Macau generated $1.66 billion in EBITDA in the past twelve months and Melco Crown's City of Dreams generated $1.39 billion. These will be neighboring properties in Cotai, and Wynn Resorts has typically been a top performer in every region it competes, namely Las Vegas and the Macau Peninsula. If that streak continues and Macau grows between now and 2016, it's possible the resort could generate up to $2 billion in EBITDA annually.
On the horizon is the potential of winning gaming bids in Boston and Japan, which are highly coveted in the industry. Neither are guaranteed but if they materialize they'll be a big win for investors.
Solid value in gaming
On the surface, Wynn Resorts' stock looks expensive. The stock trades at 26.5 times trailing earnings and its enterprise value/EBITDA is a lofty 13.
If you're looking at Wynn Resorts stock right now, you have to consider the growth coming from Wynn Palace. If the resort makes just $1 billion in EBITDA the company with have a 8.4 EV/EBITDA value and at $2 billion in EBITDA the ratio falls to 6.3. That's a great value even if the company isn't growing.
For investors with a long-term view, Wynn Resorts presents a great value in gaming. It'll be two years before growth from Wynn Palace hits the income statement but when it does the company will be one of the best positioned in gaming. That's why I think the stock is one to hold for years to come.
