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Bear of the Day: Wynn Resorts (WYNN)

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Casino companies are facing a rough road ahead. Though gambler visits and room rentals have held relatively steady in the U.S., gambling and related resort activities on the Chinese island of Macau have dropped off precipitously as China deals with an economic slowdown, a lagging stock market and the lingering pain of a trade war with the United States.

Wynn Resorts (WYNN - Free Report) is well known in the U.S as the operator of several well-known Las Vegas properties and for its charismatic – and recently deposed – founder Steve Wynn. Frequent visitors to Las Vegas are familiar with the sight of the eponymous Wynn casino and its counterpart, Encore, which Steve Wynn built with the help of his magnetic personality, deep Vegas connections and decades of industry experience gained as he moved from the Golden Nugget to the Mirage and the Bellagio.

While building his showcase Las Vegas properties, Steve Wynn was also among the first to realize the as-yet untapped potential of the gaming industry on the Island of Macau, successfully winning one of only three gaming concessions made available on the resort island and opening Wynn Macau in 2006.

Newly affluent Chinese customers were drawn to Wynn’s luxury amenities and the resort – awash in gaming revenues - was significantly expanded just one year after opening. Earnings accelerated as revenues from the Chinese properties quickly eclipsed those from Wynn’s Las Vegas properties.

Derailed by a messy public divorce from his wife, Elaine Wynn, and multiple allegations of workplace misconduct, Steve Wynn stepped down as the company’s Chairman and CEO in February of 2018. A protracted legal battle ensued for control of the company and was eventually settled with Wynn selling his remaining stake in the company – making Elaine Wynn the single largest shareholder with 9%.

Unfortunately for casino operators on Macau, the recent downturn in the Chinese economy and stock markets has weighed heavily on resort and gaming revenues recently.

In their Q2 earnings report, Wynn posted an 18% decrease in Macau casino revenues and a 13% drop in table-games turnover.

Q2 earnings were a significant disappointment, as Wynn’s $1.53/share net profit missed the Zacks Consensus Estimate of $2.03/share by 25%. Downward revisions followed and the consensus for full year 2018 earnings is now $7.35/share, down from $8.27/share 90 days ago. 2019 estimates have been lowered as well, currently at $8.27/share – down from $9.70/share.

WYNN is currently a Zacks Rank #5 (Strong Sell).

Even after shedding more than 50% of their value so far in 2018, Wynn shares still trade at a premium to industry peers with a P/E Ratio of 13.7X versus the casino industry average of 8.7X.

The demise of the gaming industry has been greatly exaggerated. Legalized sports gambling in the U.S. is a promising concept, though it's uncertain who will be the first to capitalize on it. It’s also perfectly conceivable that Asian casino revenues will rebound quickly, especially if the trade war is resolved soon.

For investors, it remains a risky space.

For those interested in the gaming industry, Boyd Gaming (BYD - Free Report) is a much better choice. A Zacks Rank #1 (Strong Buy) and operating exclusively in the U.S. - in many smaller markets as well as Las Vegas -Boyd is largely immune to the international exposure that makes WYNN’s results so hard to predict.

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