Happy Thanksgiving from GGB; Newsletter Returns December 4

FANTINI’S FINANCE: The Great Meltdown

High-flying gaming stocks of companies with properties in Las Vegas and Macau have come crashing down to earth. What does the continued slump in Macau mean for shareholders of Wynn Resorts and Las Vegas Sands?

You can call it The Great Meltdown.

The stocks of two of the most storied and glamorous names in the gaming industry, Las Vegas Sands and Wynn Resorts, have been falling to scary depths.

Wynn, once over $240 a share, is at $52 as of this writing. LVS, $85 not so long ago, is below $38.

WYNN and LVS are similar to the point of almost being twins. Both are the creations of strong-willed, visionary founder-CEOs. Both serve high quality customers. Both are Las Vegas Strip and Macau plays, and both, having ridden the Macau boom to glory, are paying the price for putting so many eggs in the basket of a Communist-run government. The last similarity is ironic given that Steve Wynn and Sheldon Adelson are such free marketers.

Of course, they have their differences. WYNN focuses on exquisite resort design. LVS focuses on the meeting and convention business. WYNN targets the highest rollers. LVS is glad to get more of the premium mass-market players and affluent tourists.

Perhaps the biggest difference is scale and geographic concentration.

WYNN is smaller and focused on Las Vegas and Macau, a high-risk, high-reward stock.

LVS is more diversified geographically, with its big Singapore operation, and relatively small, but profitable, casino in Pennsylvania.

So, in asking whether these stocks have reached bottom, and which has more downside risk, those differences are important.

WYNN has a tremendous amount riding on Wynn Palace, the $4 billion resort it opens in Cotai this year.

If it grows business, as some believe it will, if only by drawing customers away from competitors, WYNN stock can rocket back quickly. But if Wynn Palace mostly cannibalizes, it could be another down swing for the stock, including and especially if an already lowered dividend is eliminated.

LVS has less to risk and less to gain from the opening of its own Macau resort this year, the Parisian, if only because it will be so much smaller a part of the overall operation.

LVS’ dividend also appears safe and at the current stock price, it produces a hefty yield approaching 8 percent.

The next question is whether Macau is at a bottom.

That answer would appear to be yes. Year-over-year declines in gaming revenue are narrowing, and were just 9 percent in the first 10 days of the New Year. Perhaps more important, revenues grew 20 percent a day above December.

Some expenses will come down, also, as redundant labor is removed when the new resorts open. Carlo Santarelli of Deutsche Bank estimates the quarterly savings for WYNN at $15 million to $18 million.

Both companies will benefit from the rebound in Las Vegas, especially in convention business. That is an LVS specialty, but WYNN gets 20 to 25 percent of its room bookings from meetings, Santarelli points out.

Finally, there is debt. Steve Wynn has long boasted about his company’s balance sheet as good in itself allowing for strong marketing.

Majority owned Wynn Macau will need the cash flow that Wynn Palace hopes to generate. Meanwhile, the parent will have some debt to add when it develops its $1.6 billion Boston area casino.

For LVS, the big project spending is about over. The company will soon be able to focus reducing its debt-to-EBITDA ratio, or using its balance sheet for other purposes, including Adelson’s favorite of increasing the dividend by 10 percent a year.

In summary, if you are a Steve Wynn believer, you can jump in and join the high-risk, high-reward adventure. Those who have invested long-term with Wynn have always made money before.

LVS, on the other hand, might offer the steadier ride back to the mountain top.

Articles by Author: Frank Fantini

Frank Fantini is principal at Fantini Advisors, investors and consultants with a focus on gaming.