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Bull/Bear Report -- Is WYNN a Win?

Is it time to buy shares of battered casino stocks? Frankly, given the lure of gambling no matter what the economic conditions the question should have been more direct, why not buy casino stocks?

Investors have forgotten that historically, casinos have done well in good times and bad. Gamblers can counted on just like any other addiction. Look at cigarettes and the massive taxes smokers pay for their vice for evidence of this.

But this time around things may be a bit different. Over the last two decades casinos have become much more than just rooms filled with addicts throwing away money. Today, casinos are destination resorts with a more diversified revenue base.

As such, a slowing economy could have a very real impact on performance. Obviously we are seeing that anecdotally as Las Vegas appears to be suffering from a glut of room space based on the increasing offers of low priced rooms.

In the case of our stock of the week, Wynn Resorts (WYNN) though its performance is tied to more than just Vegas. Instead, growth in China and the development in Macau will have a significant impact on the future of WYNN.

Get the rest of the story on WYNN here...

With shares trading very near levels last seen when its first Vegas resort opened, owning WYNN today may be a great way to participate in that future growth. After trading as high as $176 per share, the company now fetches a more modest valuation of $87 per share.

I am firmly in the buy camp here. The market is underestimating the potential to do well even with a slowing economy and placing minimal expectations for success in China. I think that is a mistake.

More importantly the recession, if indeed we do see one, will be quite short. Imagine what this stock would be doing in a less volatile and more positive environment. It is not unreasonable to see $200 in the future for WYNN.

Now that may not happen tomorrow, but if you are a longer term investor, the risk/reward would appear to be in your favor.

What do our bloggers think of WYNN? Here are two differing opinions:

The Bull Case - Don Barrett

Let me start with Stanley Ho. How many of you have even heard of Mr. Ho? If you are of Chinese descent or maybe an international traveler or gambler, you may have heard of Mr. Ho. If you gambled in a Macau casino or visited Macau prior to 2002 you were in the neighborhood of Mr. Ho. From 1962 until 2002 Mr. Ho had a monopoly and owned all 19 casinos in Macau. Mr. Ho at 86 years old has built an empire estimated at $ 7 billion dollars at his casinos and from 1962 to 2002 in Macau he was the only game in town. So, if between 1962 and 2002 you visited Macau and rolled the dice or pulled the one-arm bandits, Mr. Ho sends his thanks.

Then in 2002 the door was opened to Macau and the competition rushed in to compete with Mr. Ho. And one of the main competitors that rushed in was Steven Wynn of Wynn Resorts. Mr. Wynn has been a fixture in Vegas for many years and is trying to hit an inside straight in Macau. To the gamblers among you, the odds of hitting an inside straight are not in your favor. But, I think Mr. Wynn may very well hit his inside straight and he already has a foot in the door and he's looking to improve his hand.

Mr. Wynn has already built a 600 room hotel and casino and he's not stopping there. Mr. Wynn already has in place financing to erect a 400 room hotel and casino adjacent to the Wynn Macau Casino. The new structure will be a tower called The Encore. And Mr. Wynn isn't planning to stop there. Mr. Wynn is trying to issue a new IPO on the Hong Kong market to raise up to $3 billion to build another 1500 to 1800 room hotel and casino on 52 acres he has already bought. It may sound like overkill but I think Macau is going to be a gambling and tourist site that will be the Vegas of the east.

Now let's look at the Wynn stock and decide if we should roll the dice. The Vegas part of the Wynn empire is to say the least slowing. I also looked at some other gaming stocks such as LVS and IGT and some others and Wynn seems to be fairing as well as the others. But Wynn and the Las Vegas Sands have an ace up their sleeves-Macau. Wynn's Vegas net income for 2nd quarter 2008 was between $18-22 million compared to a net of $63.4 million for the 2nd quarter 2007. The Wynn Macau Casino net is expected to grow from about $53 million 2nd quarter 2007 to between $100-106 million 2nd quarter 2008. With the growing number of casinos in Macau there seems to be no over-kill so far. At least for now the Vegas resort is a drag on the Macau casino earnings, but the Vegas Wynns will rebound as the economy does. Wynn Resorts is currently in the process of a $ 1.5 billion dollar share buyback.

Mr. Wynn has the Vegas Wynn Resorts and the Wynn Macau Casino in operation. He has the financing in place to erect the new 400 room Encore adjacent to the Wynn Macau. He is now looking to raise $3 billion to build the new 1500-1800 room hotel and casino in Macau and I think he may become the gaming leader in Macau. Mr. Ho had never been transparent until going public and he may have some legal problems. The Ho family is also having some internal problems and now seems to be the optimum time for Mr. Wynn to make some inroad into the Ho empire. When all 3 Wynn Macau casinos are up and running by late 2009 or early 2010 and by then the Vegas Wynn Resort should be gaining some momentum, I think the house odds at Wynn Resorts are in our favor and I would recommend we take a seat at the table and start accumulating Wynn.

The Bear Case - Goodwill Hunter

Wynn's number in Las Vegas is busted -- all the numbers are down. Operating income, table game drops, slot machine handle, all down from same period of 07.All hotel numbers are down. I believe there are too many rooms and the opening of any more rooms, i.e. the encore project, will add to this over capacity. Wynn has some good land that they got cheap, but what that worth in today's real estate market in Las Vegas? Most of the revenue in Las Vegas comes from slots as more states legalize slots this area of revenue will take a hit. Wynn will have to increase the Comps to sucker people in. Low rollers are near done in America. Consumer confidence is very low in America. The economy is in a "conjunction of dysfunction" as one JP Morgan analyst put it. I honestly believe that we are heading into a deep recession. The gaming industry will take a hit. The operating environment in Las Vegas will not improve. They should start flying in the Chinese "high rollers" from their Macau operation, which should see some increased revenue from the Olympics. I'm concerned about the Chinese manipulation of the yen to the dollar. The stock buy back program is nice, but what about a dividend and pension for their employees? If America goes into a deep recession, the effects will hurt their Macau operation. For me and gaming stocks, "all bet's are off." You can sucker some people some of the time, but not all the people all of the time.

Given that the market is extremely oversold in my opinion, I have to side with the Bull today. Casino stocks should do well no matter what the economy does. If we see a stronger economy WYNN should move higher accordingly.

Jamie Dlugosch
Executive Editor, InvestorPlaceBlogs

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Posted on July 18, 2008 3:58 PM | Permalink

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