Wynn Resorts, Limited (WYNN) is still struggling in China, but some signs suggest that a bottom may be in or near for Macau. However, before I take apart the earnings report for WYNN, let me explain exactly what’s going on in China.
You must understand that only one thing matters to Chinese leadership, and that’s the fact that every single day, they have to confront the reality that over a billion citizens have to be housed, fed, and have some kind of clothing. If not, they risk revolt.
Thus, any company doing business in China is aware that things can change at a moment’s notice, without explanation, without guidance as to when things might change back or to something different, and without any regard to impact on the business in question.
China does what it wants, when it wants, and however it wants. That means an overseas business could be gone in a matter of days. It might be because the World Tennis Championships are being held there, and some official wants to make sure everything goes right so he doesn’t lose his job, so he’ll ban table-tennis businesses so that they don’t compete with tennis.
So why are things so bad in Macau? Because all this you hear about China cracking down on corruption is aimed at keeping the proletariat in line and not resentful of fat cats living the high life at Macau casinos. Clearly the matter is serious, because only the Chinese could mess around with Steve Wynn and get away with it.
Hopefully that informs WYNN and its earnings results.
A Closer Look at WYNN Earnings
WYNN Q4 revenues were $946.9 million, down 17% from $1.138 billion because of a 27% decrease in Macau. WYNN Property EBITDA dropped 18.4% to $287.5 million. FY15 had revenues fall 25% from $5.43 billion to $4.08 billion. WYNN Property EBITDA saw a full-year decline of 33% to $1.19 billion.
When we compare WYNN Macau and Vegas, you can see the stark differences.
Q4 Macau revenues came in at $555 million, a 26.9% decline from $760 million in 2014. Property EBITDA fell 33.1% to $160.2 million, mostly due to VIP segment declines. Table game, or chip, turnover fell 37% $13 billion.
Vegas faired much better. It actually saw a 3.8% increase in revenues for the quarter, to $391 million. Property cash flow increased 14.5%, to $127 million, so that basically saved the quarter. Casino revenues were actually flat at $171 million, while non-casino revenue rose 2.7%. Wynn is fortunate in that its hotel operations are following the trend of the rest of the country. Room revenues increased 6.7% to $102 million during the quarter even though occupancy fell from 82.1% to 81.1%. Pricing power was obviously at work here, and sure enough, ADR lifted 7.7% and REVPAR was up 6.8%.
WYNN stock has $2.3 billion in cash and its debt load is $9.2 billion, and while I don’t like the average 7% interest rate, it is able to meet its interest payments.
In comparison with other casino operators, you’ll find that Las Vegas Sands (LVS) had roughly the same declines in China but better results in Vegas. MGM (MGM) has not reported its fourth quarter yet.
It’s possible that the Macau bottom is in for Wynn Resorts. Certainly, there isn’t much further WYNN stock can fall, as it is 70% off its 2014 all-time high, even after Tuesday’s 9% jump. I think you can buy here, or consider Las Vegas Sands since it is more diversified geographically. Another more conservative play is to buy long-term calls, such as the January 2017 calls that are out of the money.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance. As of this writing, he holds January 2017 $125 WYNN calls. He has 20 years’ experience in the stock market, and has written more than 1,200 articles on investing. He also is the Manager of the forthcoming Liberty Portfolio. Lawrence Meyers can be reached at TheLibertyPortfolio@gmail.com.
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