We recently downgraded our rating on Wynn Resorts Limited (WYNN), to Neutral from Outperform. The company along with its subsidiaries is a leading developer, owner and operator of destination casino resorts with properties in Las Vegas and Macau.
The rating downgrade is based on a host of factors such as limited diversity, slow recovery expected in the Las Vegas market and a highly competitive marketplace.
Wynn Resorts’ second quarter 2010 earnings were well ahead of the Zacks Consensus Estimate, driven by higher-than-expected revenues. Net revenues surged 42.8% year over year to $1032.6 million, outpacing the Zacks Consensus Estimate of $986.0 million. The outperformance was driven by a solid performance at its Macau operations.
Net revenues at Wynn Macau were $714.4 million, up 74.1% year over year. This increase was primarily driven by a significant increase in table games turnover in the VIP segment. However, Wynn Resorts’ revenues from Las Vegas operations increased marginally by 1.7% to $318.2 million, due to persistently challenged conditions in Las Vegas.
We remain encouraged with the company’s strong brand name, a healthy balance sheet, relatively low capital requirements and the ability to execute in a difficult operating environment. Additionally, Wynn Resorts is experiencing an increase in demand with a gradual recovery of the global economy. Business travelers are returning, with leisure demand increasing as well.
However, we remain cautious on the stock as the company is entirely dependent on its four properties in Las Vegas and Macau. Moreover, Wynn operates in a highly competitive Las Vegas and Macau marketplace and with more hotels opening and promotional activities increasing in Macau and Las Vegas, this could also result in excess supply and reduce the company’s market share. The recovery in the Las Vegas market is also expected to be slow due to challenging domestic economy. Additionally, any changes in government policies, primarily in overseas countries, related to the tax rates and gaming regulation can create a headwind for the company.