The hope for a pick up in Macau sure didn’t last long. Wynn Resorts (WYNN) blew third-quarter earnings estimates because an ongoing crackdown on corruption has forced high-rollers to flee the gambling Mecca.
Just two weeks ago, casino stocks like WYNN rallied after the Chinese government pledged economic support to Macau. Never mind that it was a vague promise with no timeline, the market lifted WYNN stock and others on the news.
And, of course, it’s too late for Wynn Resorts’ results for the three months just passed.
If nothing else, WYNN resorts’ earnings show how much it needs the Chinese government to do something to reverse Macau’s decline.
Gambling revenue generated in Macau dwarfs casinos’ top-line take from Las Vegas by a wide margin. Heck, annual revenue from the former Portuguese enclave is greater than all Las Vegas, Atlantic City and Native American casinos — as well as every other domestic source — combined.
But the government’s crackdown on corruption and organized crime — as well as a slowing economy and stock market crash — have made Macau a sinkhole.
Government Crackdowns Are Killing Macau
Indeed, September marked the sixteenth consecutive month of declines in gambling revenue, which fell 33% year over year.
The stark reality is that even if the government pumps development money into Macau, it will take a while to bear fruit. In a sliver of a silver lining, some analysts think the cap on gaming tables could be eased, which would provide some immediate relief.
But that wouldn’t bring back the really big gamblers, and they are critical to WYNN’s fortunes. As CEO Steve Wynn said on a conference call with analysts:
“The results of the last quarter were consistent with the things we’ve seen in previous quarters, and that is almost approximately half the business of VIP is gone and may be shrinking … Our mass business is sort of flat, and I think that’s a general description of it.”
True, officials could soften their stance on illegal activity, but that’s not going to happen. The government’s anti-corruption campaign is a central piece of policy that has been in effect for years.
WYNN Earnings Crap Out
For the most recent period, WYNN earnings came to $73.8 million, or 73 cents a share, down from $191.4 million, or $1.88, a year earlier. Excluding items, earnings fell to 86 cents. That figure missed Wall Street estimates by two cents a share, while net revenue toppled 30% to $996.3 million, led by a 38% drop in Macau’s top-line. Analysts, on average, were looking for net revenue of $1.03 billion.
Las Vegas isn’t helping matters either — Revenue from Sin City fell 3.9% in the quarter.
The fallout from WYNN’s Thursday night earnings release was sharp and swift, leading Credit Suisse to cut its price target on WYNN stock by 38%.
Bulls think WYNN will start to turn things around when it opens its third luxury integrated resort in Macau — the Wynn Palace — in March. Although it may help WYNN to balance its cost structure, “it will not be sufficient to offset top line weakness,” Credit Suisse notes.
With Friday’s action, WYNN stock has lost more than half its value so far this year.
It’s really hard to call WYNN stock a buy on valuation. Yes, shares are beaten down, and bulls can make a case that help is on the way and that things can’t get much worse.
But until the casino operator at least stabilizes its top-line trend, why play roulette with WYNN stock? Surely there are better risk-reward plays in this vein.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
