We remain Neutral on Wynn Resorts Limited (WYNN) following announcement of strong first-quarter 2013 results last month. However, competitive pressure in Macau keeps us on the sidelines.
Why the Reiteration?
On Apr 25, 2013, Wynn Resorts reported its first-quarter 2013 adjusted earnings of $2.03 per share, which breezed past the Zacks Consensus Estimate of $1.55 by 31.0% as well as the prior-year earnings of $1.33 per share by 52.6%. The earnings upside can be attributed to a strong mass market business in Macau, continued demand in the Las Vegas market and operational efficiency. Net revenue grew 5.0% year over year to nearly $1.4 billion bolstered by a respective 4.4% and 6.6% increase in Macau and Las Vegas revenues.
Macau, which is one of the largest gaming destinations in the world, has been sluggish in the recent past. Wynn Macau experienced weakness for three consecutive quarters in 2012. However, the situation seems to have improved buoyed by the mass market boom in the recently reported quarter. Moreover, its pipeline project in the Cotai region of Macau is expected to expand Wynn’s operations in Macau further.
At Las Vegas, the company is experiencing an uptrend as leisure demand continues to improve with a gradual recovery of the U.S. economy. Management remains hopeful as average daily rates are trending higher. Also, in the domestic market, Wynn seeks to build properties in higher-priced U.S. markets like Philadelphia and Boston where room rates are very high.
However, despite these enthusiastic facts, some concerns prevent us from being too optimistic on the stock. Fierce competition in Macau, the only Chinese city where gambling is legal and which accounts for around 70% of the company’s revenues, remains a blemish on Wynn’s scorecard.
The company’s upcoming project at Cotai in Macau will also face extreme peer pressure from several Chinese casino operators and the U.S.-based company Las Vegas Sands Corp. (LVS). Another U.S.-based casino giant, MGM Resorts International (MGM) is also slated to come up with a casino-resort in Cotai.
Wynn Resorts currently carries a Zacks Rank #2 (Buy). Another player in the same industry, Monarch Casino & Resort Inc. (MCRI) also looks attractive at current levels with a Zacks Rank #1 (Strong Buy) .
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