Casino operator Wynn delivers decent Q3 despite ongoing China pressures

Casino operator Wynn Resorts (WYNN) reported solid third-quarter results Wednesday, boosted by its U.S. properties, even as its China operations continued to be squeezed by Beijing’s strict Covid-19 measures.  

• Operating revenue fell 10.5% year-over-year, to $889.7 million, but beat analysts’ expectations of $871.2 million, according to estimates compiled by Refinitiv.

• Adjusted Property earnings before interest, taxes, depreciation and amortization (EBITDA) — Wynn’s key metric of profitability — increased 12% year-over-year, to $173.5 million, topping forecasts of $146 million. 

• Earnings-per-share registered an adjusted loss of $1.27 a share, steeper than the $1 per share loss predicted by analysts. 

We continue to be impressed by the strength of Wynn’s properties in both Las Vegas and Boston. On the other hand, its operations in Macao, China, remain held back by the government’s zero-Covid policy, which is out of management’s control. Nonetheless, we think the pent-up demand is so significant that this part of Wynn’s business will bounce back quickly once China’s travel restrictions are lifted.

Regarding the recent disclosure that casino and hospitality mogul Tilman Fertitta took a 6% stake in Wynn, management simply called it a sign of the value of Wynn’s equity.

This leads us to why we remain holders of a very small position in Wynn. We haven’t sold our tag end position yet just in case Mr. Fertitta turns his passive stake into an active one and/or for when China ultimately rolls back Covid restrictions for good. But if shares were to rally 10% to 15% from here, we would consider selling the rest of our small position and putting those funds into the beauty company Estee Lauder (EL), which is another great way to play a reopened China.

Wynn’s stock, which is down nearly 20% year-to-date, fell 0.42% in afterhours trading Wednesday, to roughly $68 a share.

Macao

Casino operations at both Macao properties were closed for a 12-day period in July due to a Covid-19 outbreak, and results continue to be pressured by Covid-related travel restrictions. Despite the challenge on the revenue side, management displayed solid cost control in the quarter through a combination of decreases in payroll and fixed operating expenditures.

• At Wynn Palace, quarterly operating revenue fell roughly 58% year-on-year, to $75.2 million, a slight miss compared to analysts’ estimates of $77 million. Despite lower revenues, the Adjusted Property EBITDA loss was $21.8 million, compared to forecasts of a $43 million loss.

• At Wynn Macao, operating revenue dropped 69% year-on-year, to $40.4 million, missing the consensus estimate of $62 million. But the Adjusted Property EBITDA loss was smaller than anticipated, at $43.8 million, compared to the $59 million loss predicted by analysts.

Despite restrictions on travel, management said it saw some pockets of demand during the October holiday period, especially at its direct VIP business and retail segment. The pent up demand in Macao is significant and will be realized once Beijing does an about face on its Covid policy.

Las Vegas

• The momentum in Las Vegas continued in the third quarter, with operating revenue increasing 14% year-over-year, to $544.4 million. That beat analysts’ estimates of $500 million.

• Adjusted property EBITDA increased 6% year-over-year, to $195.8 million, beating forecasts of $187 million. 

Despite concerns over weakening consumer demand in the U.S., early fourth-quarter trends for Las Vegas look resilient. Management said that the Las Vegas property’s EBITDA during October was an all-time monthly record for the third quarter, and its forward-looking indicators “remain quite strong.”

Encore Boston Harbor

• Quarterly operating revenue from this property rose roughly 10% year-over-year, to $211.8 million, ahead of estimates of $209 million.

• Adjusted property EBITDA dipped 5% on an annual basis, to $61.1 million, falling slightly short of forecasts of $62 million.

The overall EBITDA burn rate at Wynn’s digital gaming platform declined to $18 million in the quarter, improving from $21 million in the second quarter. Management sees the upcoming legalization of sports betting in Massachusetts as a catalyst due to its casino footprint. 

Wynn ended the quarter with $1.94 billion in cash and cash equivalents, but that will swell to $4.4 billion after the closing of the previously announced sale-leaseback transaction for the real estate of Encore Boston Harbor. It’s on track to close by year end. Some of that cash will go to the development of the previously announced Wynn Marjan project in the United Arab Emirates.

Even though Wynn has ample liquidity, management said the resumption of its dividend payment is dependent on the recovery in Macao, which makes sense to us.

Management opportunistically repurchased 491,503 Wynn shares for $29 million, at an average price of $58.95 a share in the third quarter. This is by no means a large amount, but the action is significant because it marked the second quarter in a row where Wynn stepped in and bought stock at a cheap level.

(Jim Cramer’s Charitable Trust is long WYNN, EL. See here for a full list of the stocks.)

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