Among the major players, 2019's top-performing casino stocks were Caesars Entertainment and Eldorado Resorts, up 100% and 65%, respectively. But their performance was driven by a buyout that the market thought was beneficial for both companies.
Another big buyout would be surprising in 2020, given how consolidated the industry has become. So investors should look at fundamental growth and underlying value that's yet to be unlocked in casino stocks. And it's value and growth that make Wynn Resorts (WYNN 0.90%) my top pick for 2020.
Wynn's place in casino stocks
After the turmoil surrounding Steve Wynn's departure, Wynn Resorts' stock had a great year in 2019. The stock rose 40%, outpacing rivals MGM Resorts, Las Vegas Sands, and Melco Resorts.
However, while the stock did well, bouncing off a turmoil-driven low, operations weren't quite what investors may have hoped for. Revenue has been fairly flat the last two years, and Macao operations have struggled.
In the third quarter of 2019, revenue at Wynn Palace in Cotai was down 18.1% and Wynn Macau's revenue dropped 18.2%. This was driven by an 18.6% decline in VIP baccarat play in 2019, compared to a 17.9% jump in mass-market baccarat play. As a VIP-focused company, Wynn certainly lost market share last year.
The good news is that mass-market play is higher-margin, which is part of the reason you see an increase in EBITDA above. As Wynn Resorts adapts to a smaller VIP market and transitions its marketing efforts to "premium" mass-market players, we should see the bottom line improve.
A year of growing operations
The other big change in 2019 was the opening of Encore Boston Harbor. The resort didn't contribute much to the bottom line, with just $7.7 million in adjusted property EBITDA, but it did generate $175.8 million in revenue in the third quarter of 2019. In 2020 we should see revenue and EBITDA improve.
Wynn Las Vegas also plans to open a $425 million, 430,000-square-foot meeting and convention facility in the first quarter of 2020. The resort has always lagged behind neighbors in the convention space, and this may make up some of that gap, while incrementally helping the hotel, casino, and restaurants.
Add it up, and Wynn Resorts is set up for a solid year of growth, even if its home markets don't grow significantly.
A hidden value that investors may not be considering with this casino stock is its real estate. As neighbors like Caesars and MGM Resorts have freed up billions of dollars in cash by selling real estate to REITs, Wynn Resorts has mostly held on to its real estate outside of some small mall sales.
In 2020, it could decide to sell some of that real estate to pay down nearly $10 billion of debt, or even pay a nice dividend to investors. I recently wrote that real estate sales could generate between $5 billion and $10 billion of proceeds based on neighboring resort sales. That would be a welcome influx for the company, and would certainly give the stock a boost.
Wynn's best days are still ahead
2019 was something of a comeback year for Wynn Resorts, but it's really just getting started. The company still has upside in Boston as its newest resort matures, and Macau should see improvements as it markets more to mass-market players.
In 2020, I think those operational improvements and the potential of an asset sale to an REIT will keep the stock charging higher. That's why I think this is the top casino stock this year.