UPSCALE GAMING RESORTS OPERATOR WITH HIGH PROFIT MARGINS, COMPELLING DIVIDENDS AND STRONG GROWTH PROSPECTS
Wynn Resorts, Limited (Nasdaq: WYNN) is an industry-leading owner, operator and developer of premier casino destination resorts with highly-profitable operations in Las Vegas (Wynn Las Vegas and Encore at Wynn Las Vegas) and Macau, China (Wynn Macau and Encore at Wynn Macau). Wynn holds 72.2% equity in Wynn Macau and 100% of the equity and voting rights in Wynn Las Vegas.
In addition, Wynn is developing a new upscale resort – Wynn Palace – in the Cotai area of Macau which is scheduled to open by Chinese New Year in early February, 2016. The company is gunning on all cylinders and recently reported record high revenues for the month of July 2014.
Wynn has 66 Forbes Five Stars, more than any other independent hotel company in the world. The company targets affluent “VIP” high-net-worth (HNW) and luxury mass market customers, has industry beating operational metrics, a highly recognized global brand, a highly experienced management team, a strong record of dividend increases and special dividends, and a conservative capital structure.
Steve Wynn, the company’s founder, Chairman and CEO, is one of the oldest, most experienced players in the casino industry, with a demonstrated track record of delivering solid value to shareholders over the past 35 years.
Whopping 24.6% Annualized Share Price Gains Since 2002
Since its IPO in October 2002, Wynn’s shares are up 14x from an IPO price of $13 to $182.45 (as of 10/17/2014) and have delivered a 24.6% annualized rate of return on capital appreciation alone, well above the 7.8% total return on the S&P 500 over the same period.
At $182.45, shares are 27% below their all-time high of $249.31 (in March 2014) on fears of a global economic slowdown, a government-sponsored clampdown on corruption in China (which could, in theory, reduce discretionary spending in Macau but ground reality does not support this concern) and heavy capital expenditure on the development of the Wynn Palace property in Cotai.
Wynn shares are currently valued at 22.5x trailing 12-month earnings and 13.7x annual cash flow, well below earnings growth of 47.7%, and offer compelling growth and dividend value for patient investors.
At $182.45, shares currently have a BUY rating (mean recommendation of 22 Wall Street analysts) with a 12-month price target range of $181 to $300 and an average of $213 per share.
Strong Track Record of Dividend Growth and Special Dividends Since 2010
In addition to capital gains, Wynn paid annual dividends in 2006, 2007 and 2009, then switched to quarterly dividends in May 2010 at $0.25 per share, and has since boosted dividends to $1.25 per share ($5 annualized).
In addition to quarterly dividends, Wynn has paid sizable special dividends (see spikes in chart below) tied to operating cash flow such as payments of $8 in November 2012 and $3 in November 2013.
On $5 in base dividends alone (even though we’re pretty sure Wynn will pay another special dividend in November 2014), Wynn shares offer a solid dividend yield of 2.74%.
Wynn Palace Cotai to Fuel Revenue Growth in Macau Beginning February 2016
Wynn currently has more demand from the premium mass market than it can handle and to meet this growing demand, Wynn initiated its $4 billion development of the Wynn Palace in the Cotai area of Macau, which it plans to complete in time for Chinese New Year on February 8, 2016. The fully-integrated resort will feature 1,700 hotel rooms, a performance lake, meeting spaces, casinos, a spa, retail, and food and beverage offerings.
Wynn Palace’s total estimated cost of $4 billion includes construction costs, capitalized interest, pre-opening expenses, land costs and financing fees, of which the company spent $1.1 billion through June 30, 2014.
Once complete, Wynn Palace Cotai is expected to deliver higher Adjusted EBITDA than its Macau Peninsula resorts, and provide a significant boost to cash flow which could be used to payout higher dividends.
Japan Expected to Legalize Gaming Soon, Wynn Favored to Win License
Wynn is actively looking at expanding into Japan and its courtship efforts are bearing fruit with Japan’s prime minister in favor of legalizing “integrated family-entertainment resorts” to boost tourism and revenue ahead of the upcoming 2020 Olympics which will be held in Tokyo. Integrated resorts could add $40 billion annually to Japan’s sagging economy. And Steve Wynn sees Japan’s culture of hospitality, perfection and high quality as a natural fit with Wynn’s focus on details and serving premier customers.
Wynn is ready to commit multiple billions to develop high-end integrated resorts in Japan but timing and execution will depend on legislative and design and construction related approvals.
Japan’s lawmakers largely favor gaming and plan to introduce a bill later in the year to legalize gaming, so resorts can be built in time for the 2020 Games.
Preliminary Win in Massachusetts Tips Balance in Wynn’s Favor
In September 2014, voters in Everett, Massachusetts, overwhelmingly approved the construction of a $1.6 billion, 500-room Wynn casino hotel which plans to have a 12,000 sq. ft. night club, a gaming area with 150 table games and 3,000 machine games in less than 17% of the resort’s area, 140,000 sq. ft. of luxury retail, premium dining and a 5-star spa. The resort expects to pull-in 7 million visitors each year – more than the Bruins, Celtics, Patriots and Red Sox combined – and will boost the local economy.
Wynn Everett will create 4,000 long-term jobs paying an average of $56,000, 2,000 indirect jobs at symbiotic businesses, and 4,000 construction jobs for the duration of the build-out, and will become one of Boston’s Top 5 private employers, paying $267 million in annual local and state taxes. The deal has strong local support because it will rejuvenate the Everett area and because Wynn has a culture of treating its employees well.
Wynn Everett will be financed, owned and entirely managed by Wynn. It will be located on the Mystic River waterfront, a toxic waste site (formerly a Monsanto chemical plant site) that Wynn will first clean up.
However, lawsuits by groups that were denied Massachusetts gaming and casino licenses will take time to resolve and could delay the Wynn Everett project, though Wynn will likely prevail in the end because of the overwhelming attractiveness of everything the deal offers.
Market Leading Metrics in Las Vegas, Macau
As the graph below shows, at $501 million (LTM ending 6/30/2014), Wynn Las Vegas earns 28% more EBITDA than its closest competitor, Bellagio at $390 million.
Similarly, Wynn Macau is more productive than its peers with over $70,000 in EBITDA per gaming position versus slightly under $60,000 for its closest competitor, the Four Seasons Macao which also targets premium gamers.
Wynn achieves this outperformance with a unique business model that drives sustained performance with a focus on an “integrated” resort experience where everything is designed around Wynn’s customers (high net worth individuals with a lot of discretionary income) and what appeals to them – from excellent staffing for a highly-personalized stay with pleasant, memorable interactions at each customer touch point, carefully selected in-resort retail shopping options and a unique gaming floor experience to top quality food and beverages.
Steve Wynn strongly believes that customers at his resorts remember their human interactions and a good guest experience does more for word-of-mouth marketing and brand building than furnishings, and trains his staff to be the best and pays them well so they have little incentive to leave.
And Wynn’s high 98.4% occupancy rate, with heavy repeat customers, and stellar profits reflect the validity of this approach.
Comparison to Category Leader, Las Vegas Sands, Shows Higher Margins at Wynn
Las Vegas Sands Corp. (NYSE: LVS) is the most profitable casino in dollar profits. Sands has 10-times the number of rooms as Wynn, yet Wynn generates
half of Sands’ total EBITDA with 90% fewer rooms, with 7-times more in retail sales per square foot than Sands (on which Wynn collects 14% as rent), almost 3-times more in sales per slot machine and 1.6x collections per table.
This comparison attests to the success of Wynn’s integrated resort concept in getting more dollars per unit. However, designing resorts that cater to HNW individuals requires strong attention to detail, higher initial investment and more time to build. The best summary for this is reflected in Wynn’s 3.8x higher EBITDA per room in Macau and 3.8x higher EBITDA per room in Las Vegas, relative to Sands.
Macau Growth Concerns Overblown
Wynn shares have been beaten down of late on reports of a 20% decline in gaming-related spending by the VIP customer segment, the first decline in five years, with customers purportedly reining in spending on news of an economic slowdown in China and a fresh crackdown on corruption in China under the assumption that big bets might attract unwelcome scrutiny on wealth sources. However, analysts on-the-ground do not see any real slowdown in Macau and expect growth to continue to flourish with the Chinese government’s full support.
Highly Experienced Management Team
Wynn is headed by founder, Chairman and CEO, Steve Wynn, who is a majority shareholder and earlier developed and operated the Mirage (1989), Treasure Island (1993) and Bellagio (1998) before focusing on Wynn. In October 2014, Harvard Business Review ranked Steve Wynn at #17 on its list of The Best Performing CEOs in the World.
Matt Maddox serves as company President and was promoted to his current position after serving as Chief Financial Office. He joined Wynn Resorts in 2002 from Caesars Entertainment and has a strong understanding of the numbers and analytics behind gaming profits.
Gamal Aziz serves as President of Wynn Macau and earlier served as President and COO of the MGM Grand, one of the largest casino hotels in Las Vegas.
Stephen Cootey serves as Chief Financial Officer and Treasurer, and joined the company in January 2014 from a senior finance position at gaming category leader, Las Vegas Sands Corp.
Steve Wynn runs the show but delegates significant responsibility to his highly-experienced team, and their strong track record is evident in shareholder returns and industry-leading operational metrics.
Strong Q2 2014 Results with 56% EPS Jump
For its second quarter ended June 30, 2014, Wynn reported net revenue of $1.4 billion, up 6% on a 12.5% increase in Las Vegas and a 3.2% gain in Macau, with Adjusted Property EBITDA of $467.4 million, up 9.8% over Q2 2013, and GAAP net income of $203.9 million ($2 per diluted share, up 56.3%).
Of the $1.4 billion, Macau brought in 960.6 million or 68%, up 3.2%. Macau results are reported by VIP and Mass Market segment. VIP table games’ turnover was down 11.7% to $26.4 billion, with a win rate of 2.93% which is within operating metrics. Wynn Macau had an occupancy rate of 98.4%, up from 95.5% a year ago; revenue per available room was up 9.7% to $329 and gross non-casino revenues were up 0.7% to $100.6 million.
Wynn operations in Las Vegas contributed $451.4 million to net revenues, up 12.5%, with Adjusted Property EBITDA of $160.4 million, up 18.3% to a record high on a 5.9% increase in table games win percentage and a 7.3% jump in room revenues.
Macau contributed $307 million in Adjusted Property EBITDA, almost double the $160.4 million contributed by Las Vegas operations.
The company ended the quarter with a strong balance sheet and ample liquidity, with cash and investments of $3.3 billion, total assets of $9.07 billion, long-term debt of $7.31 billion ($3.1 billion of Wynn Las Vegas, $2.3 billion Wynn Macau, $1.9 billion parent company debt) and shareholders’ equity of $288.2 million.
While Wynn Japan or Wynn Everett resorts are not imminent, they reflect sizable future growth opportunities in addition to Wynn Palace Cotai in Macau which is expected to exceed Wynn properties in Macau peninsula. The company has a strong balance sheet and free cash flow generation to keep dividends healthy. Wynn has delivered exceptionally for shareholders, has operational metrics that soundly outperform leading casino-operator (by volume) Las Vegas Sands and is actively capitalizing on expansion opportunities by leveraging its 5-star brand. Shares are currently beaten down relative to their 52-week high and present a strong buying opportunity for investors who can sit out near-term volatility for solid future gains.