The resort casino business has become a lot tougher since gambling became legal pretty much everywhere.
In the United States, the business used to be more or less a license to print money. When legal betting was limited to Las Vegas and Atlantic City, N.J., opening a new property pretty much guaranteed success. Now, however, the U.S. gambling market has become crowded, with casinos and legal betting offered all over the country. This has changed the game and increased the pressure on companies such as Wynn Resorts (NASDAQ:WYNN) and Las Vegas Sands (NYSE:LVS) to spread their operations out globally.
Wynn has its signature property in Las Vegas, as well as a resort/casino in Macau. Las Vegas Sands has even more diverse operations, with locations in Las Vegas, Bethlehem, Pa., Macau, and Singapore. Both companies have stabilized their operations in Las Vegas, a market that struggled when the U.S. economy did, but has since largely recovered.
For these two stocks, the tale will be told overseas -- most specifically in the Chinese territory of Macau (which Sands spells "Macao") -- where the market has taken a major downturn as the economy in China has struggled.
A case for Wynn
The biggest argument in favor of buying Wynn shares may well be that the company, while smaller than its rival, has much less exposure in Macau. Roughly 60% of its total revenue -- $608 million of just under $1 billion -- came from its Chinese operation, a single property, while Sands has four operating casino and hotel resorts in the Chinese territory.
If China continues its downward trajectory and the market becomes less viable, Wynn has to figure out how to keep one location afloat while its rival will be bailing water on four sinking ships. Of course, that edge is minimized by the fact that Wynn is well under way on construction of Wynn Palace, "an integrated resort containing a 1,700-room hotel, a performance lake, and a wide range of amenities; including meeting, retail, food and beverage, and casino spaces, in the Cotai area of Macau," the company wrote in its Q1 earnings report.
To call that project, which opens in Q3, a poorly timed venture would be like saying that betting on the Los Angeles Clippers to win the National Basketball Association title right before Chris Paul and Blake Griffin had season-ending injuries was bad timing. Wynn has doubled down at a time when any company would want to be cautious in the market, but megacasino resorts aren't fast-food restaurants that can be tossed together overnight, and this project seemed like a good idea when it was announced during the height of Macau as a growth market.
In addition, the company has a $2 billion project in a Boston suburb under way. That casino would be the only one operating directly in that market, but nearby properties in Connecticut and the other side of Massachusetts may limit the drawing power of the Boston casino/hotel.
The case for Las Vegas Sands
While Sands has more properties in Macau, it has also done a better job managing the decreases at those casino/hotels. Wynn saw net revenues from the Chinese territory decline by 13.8% in Q1, while Sands held its decline to 7.9%.
CEO Sheldon Adelson explained how the company pulled that off in its Q1 earnings release.
"The operating environment in Macao remained challenging during the quarter; but we do see signs of stabilization, particularly in the mass market," he said. "Our focus on the higher margin mass and non-gaming segments and the geographic diversification of our cash flows enabled us to once again deliver in excess of one billion U.S. dollars of hold-normalized adjusted property EBITDA during the quarter."
Of course, the company is still placing a big bet on the idea that things won't get worse in Macau, and that's an answer that's hard to predict.
Which is a better buy?
Sands is the bigger company, spread out over more locations, but it has proved that even with its massive exposure in Macau it can still deliver positive bottom-line results. Wynn has done well in Las Vegas and deserves credit for managing its own China problem, but moving from two properties to three, with the second Macau casino, and then four, with the Boston property, add greatly to the risk involved.
Neither one of these companies' shares make sense for a risk-averse investor. Both have too much exposure in a market where things could improve or where they could go from stable to unstable very quickly. If you must pick one of these two go with Sands, but for now, it makes sense to wait until Macao and China shake out before investing in either of these companies.