Steve Wynn Is Still Making a Good Bet on Macau

Image source: Wynn Resorts.

As investors, we often get caught up in how a company's performance looks compared to the past or to analysts' estimates. Depending on how they compare, it makes any given quarter appear to be "good" or "bad." For example, Apple made less money last quarter than a year ago and it was deemed a disaster. But when Amazon reported a profit 1/20 of what Apple did after years of losses, it was deemed a massive success. And sometimes those initial comparisons don't truly tell how a business is doing. 

It can be important to take a step back and look at what we should really analyze and how we should measure success. And that's what I think investors should do with Wynn Resorts (WYNN 1.38%) and its new property in Macau, Wynn Palace. Fellow Fool Rich Duprey recently asked if Wynn was about to lose its $4 billion bet on Macau and said investors may want to cash in because other regions in Asia are coming into the gaming market. As a Foolish look at the other side, let's look at why Wynn Palace is a great bet for Wynn Resorts.

No doubt, Macau is in decline

 After declining 34.3% in 2015, gaming revenue is down 12.4% so far in 2016. But that doesn't mean Macau is a bad place to build a resort. Last year, Macau still generated $28.5 billion in gaming revenue, dwarfing the $6.3 billion made on the Las Vegas Strip. 

Another way to look at it is that Wynn's Macau resort generated nearly four times the return its Las Vegas resort did when you look at EBITDA (a proxy for cash flow from a resort) divided by construction costs.  

TTM = trailing 12 months. Data source: Company earnings releases and SEC filings.

Was it a bad bet to build Wynn Macau compared to Wynn Las Vegas, even when you consider that Wynn Macau's earnings are down year over year? 

Wynn Palace can still make Wynn billions

The $4.0 billion Wynn Palace is no doubt the company's biggest bet in Macau, but it's also a fairly safe one. It's the company's first property on Cotai, where Las Vegas Sands (LVS -1.18%) and Melco Crown (MLCO 0.49%) dominate the landscape. And even a conservative estimate of profitability makes it look like a good bet. 

Rendering of Wynn Palace. Image source: Wynn Resorts.

In a recent presentation to analysts, Wynn estimated that Wynn Palace would generate $740 million in EBITDA in 2017 even if the Macau's gaming market was essentially flat, which is what analysts are expecting. The estimate is only for $435,000 in EBITDA per hotel room annually, much lower than the $703,000 the company makes at its existing resort, so I think that's a pretty conservative estimate.

If Wynn Palace does generate $740 million in EBITDA, it would have an 18.5% ROI, based on the same calculation I did above. That's nearly double the ROI currently being generated in Las Vegas.

Macau can still be a good bet

Wynn Resorts, Las Vegas Sands, and Melco Crown are all "struggling" with falling gaming revenue in Macau, but sometimes that needs to be put into perspective. While they're not generating the same amount of money as they were two years ago, they're generating returns that most companies would give an (metaphorical) arm for.

Wynn Resorts isn't making a bad bet in Macau and the region would have to see its nosedive continue for years for that to be the case. It's just not going to make as much as it may have thought when construction started. But that doesn't make it a bet Wynn, or investors, shouldn't take.