Wynn Resorts (WYNN +0.22%) is often overshadowed by its bigger rival Las Vegas Sands (LVS +0.04%), but Wynn's near-70% rally this year actually crushed Sands' 20% gain. Let's examine Wynn's strengths and weaknesses to see if it still has room to run.
What does Wynn Resorts do?
Wynn's flagship Vegas properties -- The Mirage, Treasure Island, The Bellagio, and Wynn Las Vegas -- fueled the modern rebirth of the Vegas Strip as a tourist and family friendly destination which started in the late 1980s. After the Vegas market peaked, Wynn expanded into China with the Wynn Macau in 2006 and the Wynn Palace Cotai in 2016.
Macau, China. Source: Getty Images.
Last quarter, Wynn's Vegas properties generated just 28% of its total revenues. 45% came from Wynn Macau, and the remaining 27% came from the Wynn Palace Cotai. Revenues and adjusted property EBITDA (a key metric for gauging profit growth at resorts) have been rising at its Vegas properties and Wynn Macau:
|
Q2 2017 |
Net revenue growth (YOY) |
Adjusted EBITDA growth (YOY) |
|
Las Vegas |
3.1% |
8.1% |
|
Wynn Macau |
6.8% |
10.5% |
Source: Wynn Q2 earnings report.
Wynn Palace is also posting healthy numbers, but it's been open for less than a year. Macau's total gaming revenues rose 20% annually in August, marking the region's 13th straight quarter of year-over-year growth -- so Wynn's Macau properties should keep generating healthy returns over the next few quarters.
As a result, analysts expect Wynn's revenue and earnings to respectively rise 35% and 45% this year. After annual comparisons involving Wynn Palace normalize, it's expected to post 5% sales growth and 24% earnings growth next year.
Recognizing Wynn's weaknesses
Wynn's headline numbers look great, but it has a few weaknesses. First, its VIP growth in Macau outshines its mass market growth, with Wynn Macau posting an annual increase in VIP revenues partly offset by a decrease in mass market revenues last quarter.
The Wynn Macau. Source: Wynn.
That disparity could cause trouble if Chinese authorities keep cracking down on high rollers with corruption and money laundering probes. Junkets that cater to those VIPs have also been targeted in recent investigations.
Wynn's non-casino revenues at Wynn Macau (9% of the property's revenues) also fell by the double digits last quarter as occupancy rates, average daily rates, and revenues per available room all dropped. These same issues could impact Wynn Palace's year-over-year growth figures next year.
Investors should also note that Las Vegas Sands dominates the heart of the newer Cotai Strip with four finished properties and two upcoming properties. Wynn Palace remains in the side streets, along with competing properties from MGM Resorts and SJM. Sands' newer properties, like the Parisian and other resorts, could pull visitors away from Wynn's properties.
Lastly, Wynn is a pricey stock with a mediocre dividend. Wynn trades at 55 times trailing earnings and 24 times forward earnings, which compares poorly to Sands' trailing P/E of 25 and forward P/E of 23. Wynn's forward dividend yield of 1.4% is also much lower than Sands' 4.6% yield.
But mind the opportunities...
Wynn is well aware of the risks facing its Macau properties, so it's expanding into additional markets to diversify its business. First up is Wynn Boston Harbor, which will become the only integrated casino resort in the greater Boston area when it opens in mid-2019.
Looking further ahead, Wynn plans to expand into Japan, which legalized casinos late last year. It's unclear how many resort licenses will be sold, but Wynn and Las Vegas Sands both intend to plow billions into the Japanese market to expand their reach across Asia.
So is it time to buy Wynn Resorts?
Wynn's growth looks solid, but I don't like its valuation, dividend, and its position as the "second best" player in Macau. I'd rather stick with Las Vegas Sands -- which I've been accumulating over the past year -- since it's the top player in Macau, it has a lower valuation, and it pays a much higher dividend.
