Is This Popular Casino Stock Set To Rebound?

Sara Nunnally's picture

Thursday, August 25, 2016 - 12:30pm

by Sara Nunnally

Does anyone ever believe anybody who says, "We'll be fine"?

My guess is that this phrase is met with an awful lot of skepticism, as it should be. It's a bit too nonchalant, isn't it?

Especially when it comes on the back end of a $4.1 billion investment.

Yes, those are the words that came out of CEO Steve Wynn's mouth after the opening of the -- what CNBC calls -- lavish Wynn Palace in Macau:

In every business there are good years and bad years. For our return on investment, I expect we will be fine.

Wynn Resorts (Nasdaq: WYNN) opened its $4.1 billion Wynn Palace on Monday, August 22, in the middle of a gambling slump.

From CNBC:

July marked Macau's 26th consecutive monthly gaming revenue decline, with gross gaming revenues declining 4.5 percent during the month on a year-over-year basis. Daiwa estimates Macau's GGR will fall by 10 percent in 2016 from the prior year.

So that's why Steve Wynn's comments don't inspire a lot of confidence from me.

But I have to say that this slump is a bit heavier than I expected it to be. I've spent a lot of time researching and writing about China's growing consumer class, and how the economic shift -- while tumultuous at times -- was a necessary step in growth.

I've always understood that slower growth, sliding GDP and losses in some industries were to be expected.

And yet, the more than two-years-worth of declining revenue in Macau comes as a bit of a surprise.

It reveals something very interesting from a macro perspective, and one that might have investors second-guessing Wynn's new casino.

It shows that despite the phenomenal (and I do mean phenomenal) growth of the middle class in China, there's still a bit of an economic divide between those wealthy enough to splurge on a trip to Macau and those not.

Let's think of this in overly simplistic terms. Many of China's wealthy made their money from the previous export-based economy. This economy is shrinking. That means this demographic is spending less money on frivolities, like gambling.

The new economy -- one based on domestic consumption -- is still getting its legs under it. There have been some wildly successful stories, like Internet-based stocks, for example, but it's not enough to completely prop up the full Chinese economy.

And that's why we're seeing a drop in spending from higher-end groups.

What that means for Macau could be continued losses.

That's not stopping casinos and resorts from opening up in Macau, though, making the market even tougher for companies like Wynn to turn a profit. In fact, Las Vegas Sands (NYSE: LVS) is going to open a new hotel and casino in Macau next month, just in time for China's National Day celebrations that typically bring in lots of tourists to Macau.

Will Wynn Palace get there? Eventually, yes.

In June, Macau brought in gambling revenues of $2 billion, down 8.5% year over year. That kind of money spread over many casinos and resorts means a slower rate of return.

Take a look at WYNN's annual revenues:

via Yahoo!Finance

Revenues are in green, and earnings are in blue (via Yahoo!Finance). With Macau expected to post another big loss in revenue for 2016, WYNN's next annual report isn't going to be glowing.

But some analysts think WYNN and Macau could be reaching a bottom.

John Bruce, Director of Operations at Hill & Associates, believes the Wynn Palace will be a good property in the long run.

He told CNBC Hong Kong:

I do think, and I'm being very careful here that it's not quite coalesced yet, I think we may not have a 27th month of downturn. We may have a 27th... I don't think we'll reach a 30th. I think we're reaching that turning point.

And on Steve Wynn and his Wynn Palace in particular, Bruce said, "He has got short-term problems to ride out. I mean, revenue in 2015 was about 35% down from a high in 2013, but it's still five times what was being made in Las Vegas in the same time."

That could mean share prices may suffer in the short-term, too. Analysts are mostly rating the company as a hold for now.

But the future could hold better fortune, if, indeed, Macau does experience a turnaround.

This is a ten-year chart for WYNN. You can see the massive comeback from the financial crisis, and the ultimate topping out before the steep drop back to near $50 a share.

What's interesting to see is the big spike in volume on that initial bounce. WYNN has clearly put in a bottom.

Risks To Consider: That bounce took WYNN back up to nearly $100 a share in a relatively short timeframe. This could mean the stock is losing momentum, and recently, we've seen a bit more sideways trading than pushes higher.

From a technical perspective, that trading takes us right up to a previous level of support that turned into sharp resistance back in early 2015 two-thirds of the way through the slide. I've marked that level with a red line in the chart.

This could limit upside movement, particularly if upcoming revenues and earnings reports are lackluster, as many expect them to be.

That makes Wynn a waiting game.

If Macau does recover, and figures out how to make money from less-affluent consumers (as it appears to be trying to work out), then Wynn could catch the upswing and be well positioned to profit in the long-run.

Action To Take: Waiting is always hard, but often times, it pays off. What's imperative is that we see what happens to share prices once they run up against the red line of resistance. Investors should watch this level before making any decision to invest.

Shares will need to break through the red line and test it with a bullish pullback to make sure of support for higher prices. Only then should investors pull the trigger.

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Sara Nunnally does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.