"You can get excited about the future. The past won't mind." -- Hillary DePiano
This is the year of the rooster. And Wynn Resorts Ltd. (NASDAQ:WYNN) released its Q4 earnings loaded with positive nuggets. But you wouldn't know it by the headlines that screamed "earning miss" all over the financial news landscape. It was a big miss for certain: 50 cents against analyst expectations of 87c. But below the bold type was the revenue number: $1.3 billion for Q4 up 37.3% yoy over analyst forecasts.
Wynn Palace in Macau, the newest jewel in the company crown, only open since last August 22 contributed to the mitigation of potential cannibalization posting $418.7 million in revenue of which $373.2 million was in gaming.
Wynn Macau, the company's 10 year old property reported a 10.7% revenue decline in the period to $498.4 million, mostly in gaming. Was this the cannibalization all the naysayers were fearing would sink the new property after a slower than anticipated start? True to his philosophy of keeping expectations low and performance high, Steve Wynn had months ago told investors the company could well experience a 20% to 25% cannibalization rate under certain circumstances, the implications being, that it really was unknowable.
So the net nugget here is that Wynn had between 10% and 15% less cannibalization than forecast, putting a mitigating positive tone to the news. Overall for the full 2016 year, revenue increased 9.6% to $4.47 billion from $4.08 billion with adjusted net income dipping slightly to $3.39 a share vs. $3.44 a share.
Overall occupancy at the properties was 88% and our information as of this morning from conversations with Macau friends last night is that Chinese New Year is a sellout
On the news Wynn shares opened this morning at $103.13 up 7.72%, having crossed several resistant points in the 90's prior to the earnings release.
What's going on here and what's the play?
What we're seeing here is that much of the uncertainties and fears about the stock based on big headwinds and a still nascent recovery of Macau GGR are being dispelled by results---imperfect as they may be. But its clear these factors were all baked into the shares before the earnings release and now the animal spirits we call "The Wynn Premium" may be unleashed, moving the stock even higher toward the range we've called at $135 by the end of Q2.
1. The cannibalization issue
What's actually happened behind the numbers? What is clear is that Wynn Macau customers, mostly VIPs, migrated over to the new property for a look and a play and liked what they saw. Secondly that the overall appearance of mass play as well gave currency to the idea that the inherent depth of the market supports lots of growth ahead. Casino properties in underserved markets are always elusive to forecast.
It's a bit misleading to zone in on the 10% decline at Wynn Macau as cannibalization in the pure sense. it is clear from our readings that most of that business moved over to Wynn Palace for a look-see visit. So the question is raised: Is it true cannibalization when business migrates from one property to another under the same ownership? In the larger sense we must judge results by the total revenue generated by both properties since it fundamentally makes no difference which pocket the money goes into if both pockets are in the same pair of pants.
Clearly history has a lesson for us here. In Las Vegas historically we've had multiple property operators flying under the same flag.
The original Hilton Hotels serve as a perfect example. You had the Flamingo Hilton at the four corners which was aimed at the mass package travel market, mainly at the time, weekenders from Southern California. That property was a literal gold mine and one that Barron Hilton himself told me was his particular "pride and joy" because it had the fattest margin of any operation in the town. Yet, crosstown sat the huge Las Vegas Hilton, which took aim at the convention and VIP business. It was the far away leader at the time in non-gaming revenue, but also had a robust VIP business mainly coming from Mexico and the Far East.
While from a pure property by property performance measure you like each one to stand alone and produce revenue and profits to its capacity, the fact is that you need to judge the stock on the totality of its EBITDA as a multiple property operator in a single market. The same history was repeated in Atlantic City where Harrah's originally partnered with now President Donald Trump opened on the boardwalk competing for that business against it's own money machine at the AC Marina. Both properties targeted a segment of the same total market. Harrah's was a very early proponent of database marketing even before the technology boom created such sophisticated programs as Total Rewards, moving customers from one of its properties to another.
2. Going forward: So what we are seeing now in Macau with Wynn and certainly with Las Vegas Sands (NYSE:LVS) and later this year MGM Resorts International (NYSE:MGM) is the concept of leveraging the database from one company property to another recognizing that customers are not robotically planted at one favorite property but periodically get the urge to have a play elsewhere. The rationales are many: change of luck, see a new property, leverage current status within the same database on comps, see a favorite entertainer, experience a new restaurant. You can be certain much of the cannibalization we did see came from inside Wynn Macau itself. Our sources tell us that Its player development teams were out marketing to its best VIPs to visit the spectacular new property and experience its casino floor, rooms, restaurants, shopping venues and shows.
In the case of Wynn Palace this logic faces a broader test because its $4.1 billion cost sets up a high hurdle rate in the ROI number management used in its planning six years ago. It was a time when Macau was knocking it out of the park quarter by quarter.
Many observers have implied that management's ROI was originally set against those old assumptions and that Wynn overbuilt. Had they foreseen headwinds like the junket crackdown, currency rules, smoking ban threat,etc, would they have pared down the cost to allow for a more comfortable hurdle rate going forward? Who had that kind of crystal ball? No one did. But the answer to that question in general is possibly yes, but for Wynn probably no.
The company does not know how to build at or below market expectations. Its very DNA has always been to build the most dazzling property on the assumption that eventually the market will appreciate its quality and service and come to them. And over time it has. And now given the early results from Wynn Palace we believe as the year plays out, absent of any new government headwinds nobody can forecast, we'll see the usual dips here and there but the long term trajectory is confidently up.
Now we find the market in the still early stages of a recovery, rapidly moving from respectable to robust. Our GGR number for 2017 is in the range of a 9% to 15% upside depending on certain macro elements in the Chinese economy, infrastructure improvements. In the case of Wynn, some progress in the slow but steady removal of construction barriers that still inhibit cross property customer migration. Wynn should get a nice boost by Q3 of this year when it gets a new Cotai neighbor: MGM. Both properties will poach one another and likewise benefit by exposing their customers to each other. Moreover the net increase in total Coatai rooms helps everyone. In the final analysis this business always comes down to one single factor: bodies at tables, heads on beds. In Macau lack of bodies will never be a problem given the population base of China and the assumed continuation of Macau as the single venue in all of that country where gaming is legal.
It's the year of the rooster. And despite the earnings miss, Wynn has given shareholders news it can crow about.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.