4 Things To Watch When Wynn Resorts Reports Earnings On Thursday

Wynn is expected to report EPS of $0.77 on $1.13 billion in revenue. After two years of declining EPS and revenue, Wall Street is expecting to see renewed growth in both, at a little over 5% year-over-year.

Wynn's troubles started two years ago in Macao—considered the world's biggest casino market—when the Chinese government decided to harden its stance on corruption and money laundering. That decision led to uncertainty and fear among high rollers, who then opted to avoid potential trouble by skipping the Chinese special administrative region, heading instead to other Asian gambling destinations such as Singapore and South Korea. Twelve months trailing, for Q2 2014, the resort's revenue was $6.2 billion, while its EPS was $8.21. Two years later the numbers are down to $4.3 billion and $3.24 EPS, meaning the company lost 30% of revenue and 60% of its profits. The stock price fell accordingly, from a high of $247 in February 2014 to a low of $50 in October 2015, a spectacular 80% drop in value.

On August 22, after a six-year construction period, the company opened its brand new, $4.2 billion Wynn Palace resort, doubling its presence in the area. This is expected to boost WYNN's growth in the third quarter. But don't get too optimistic.

First, Chinese authorities have limited the number of gaming tables Wynn Palace can host. The new resort was allocated only 100 tables, compared to 520 at the Wynn Macao, the company's older resort in the region. Recently, the company was told it would get an additional 25 tables beginning 2017 plus 25 more a year later. In addition, according to CNBC , WYNN will reallocate 250 tables from its older property, bringing the total number of gaming tables at the new casino to 350.

Still, with fewer tables at each resort—effectively cannibalizing its casino floor revenues—it will take a lot more time for Wynn to recoup their initial investment, as well as grow revenue.

Alongside the lack of growth within its own resort network, WYNN also faces relatively stiff local and regional competition from other, Macao-based casino resorts as well as additional regional gambling hubs. The Chinese government's crackdown on money-related crimes, particularly within the gaming industry, which began in 2014, has driven away a lot of gamblers from Chinese borders, sending them to other Asian destinations such as the Philippines or Singapore.

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While Macao is still regarded as Asia's most luxurious gaming destination, the last couple of years have made the gambling population more aware of regional competitors. As a result, some business might never come back. And Wynn is hardly the only casino business operating in Macao, where the competition is stiff. Melco Crown (NASDAQ:MPEL) opened its brand new, movie-themed Studio City last October. The Las Vegas Sands (NYSE:LVS) officially opened The Parisian, just last month.

Unfortunately, there is little to report on the Las Vegas front. Once considered the world's sin capital, the city's reputation has dimmed and revenues from local casinos have largely stagnated, including from WYNN's two Las Vegas properties. Revenues from the US operation dropped 1 percent year-over-year for Q2. Change to the company's bottom line was marginal.

As a rule, strong casinos are the result of a strong economy. The gaming industry in the US has not yet seen the benefits of the slowly strengthening US economy.

Conclusion

A casino's performance is affected by many factors—monetary regulations, gambling regulations and the strength of the local and even global economy all have the potential to make or break a casino. That's been clearly demonstrated by the decline of Macao's casinos over the past couple of years. As such, it’s always better to invest in the gaming business at a discount rather than at a premium.

With a current stock price of $95.52 as of yesterday's close and a P/E ratio of 29.55, Wynn Resorts is hardly trading at a discount, especially with the Las Vegas Sands trading a bit more cheaply, at $58.16 and a P/E ratio of 28.32 at time of writing.

Could Wynn Resorts reclaim the heights at which it was trading in early 2014, above $200? With everything going its way plus a home run with the new Wynn Palace, probably. However, at this point, that's far from certain. Already up nearly 100% from its early 2016 bottom of $52.76, it's likely those who jumped on the stock during the early days of the most recent dip have already seen the benefits a hefty discount and have made their money. In our view, now is probably not the time to take a position in Wynn Resorts.

Written By: Investing.com