Higher Rates Will Drive Wynn Resorts’ Domestic Hotel Operations In The Coming Years

Wynn Resorts (NASDAQ:WYNN) continues to benefit from higher demand at its U.S. hotel properties, and this has led to better pricing for the company’s hotels over the past few years. The average daily rate (ADR) has been growing steadily at an average annual rate of around 5% since 2010, driven by the recovery in the U.S. economy and higher personal disposable income, which grew from a little over $11,500 billion in January 2011 to over $13,317 billion in March 2015. ^[1] However, ADR is still lower than the pre-recession levels, and this can be attributed to the company’s efforts in keeping the occupancy rate high. Casino operators are motivated to sustain occupancy in order to generate demand for the casino and other ancillary facilities, thereby compromising the ADRs. Wynn has maintained the occupancy rate at over 85% since the past few years and now it should focus on ADR growth at a faster pace, in our view. Currently, we expect ADR to grow at an average annual rate of 4% in the coming years and reach pre-recession levels by 2016. On that note, we discuss below Wynn’s domestic hotel operations over the past few years, and what can drive the segment growth in the coming years.

We estimate gross revenues of about $5.50 billion for Wynn Resorts in 2015, with EPS of $4.42, which is higher than the market consensus of $4, compiled by Thomson Reuters. We currently have a $135 price estimate for Wynn Resorts, which is around 25% ahead of the current market price.

See our complete analysis of Wynn Resorts’ stock here

Higher ADR Will Drive MGM’s Hotel Operations In The Coming Years

We estimate that the Las Vegas hotel business contributes around 10% to Wynn’s value. The hotel operations are driven by ADR and occupancy levels. Wynn’s ADR has been trending well over the past few years and has increased at an average annual rate of 5% from $210 in 2010 to $274 in 2014. ^[2] This compares with an average growth rate of 7% for MGM Resorts’ (NYSE:MGM) U.S. hotel ADR, and an average growth rate of 4% for Las Vegas Sands (NYSE:LVS) Las Vegas hotels ADR during the same period, as shown in the chart below.

ADR is largely dependent on the hotel’s occupancy levels as it is the demand that weighs on the pricing of the rooms. Apart from casino guests, the hotel sales team is focused on bringing in a defined number of room nights through various events and shows. We estimate Wynn’s ADR to grow in the coming years and reach pre-recession levels of $300 by 2016 and over $350 by the end of the decade. This will translate into revenues of $600 million and an estimated EBITDA margin of 43% will translate into EBITDA of $270 million, representing less than 10% of the company-wide EBITDA. This growth will primarily be driven by a better macroeconomic environment in the U.S., in our view. However, any different ADR will not have much impact on Wynn’s stock price, given the segment’s low contribution to the company’s value.

As the macroeconomic environment improves, personal disposable income is expected to improve. This would boost demand for luxuries, including travel, leisure and entertainment such as casinos, and we expect Wynn to benefit from this. Moreover, a recovery in global economies and sophisticated financial markets of emerging economies are driving growth in international travel, especially from China. According to the National Travel And Tourism Office, the U.S. visitation has increased from close to 60 million in 2010 to over 74 million in 2014. ^[3] This is further driving the average guest spend as well as occupancy levels of the hotels. The overall industry will continue to grow in the coming years with average annual travel and tourism GDP growth rate of 4% till 2024, according to the World Travel And Tourism Council. ^[4] All these factors will lead to higher room pricing and drive Wynn’s hotel operations in the coming years.

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1. United States Disposable Personal Income, Trading Economics [↩]
2. Wynn Resorts’ SEC Filings [↩]
3. 2014 Monthly Tourism Statistics, Office of Travel & Tourism Industries [↩]
4. Economic Impact of Travel & Tourism 2014Mid-Year Update, October 2014, World Travel And Tourism Council [↩]