What Will Drive The Growth For Wynn Resorts’ Slot Machine Operations?

The Las Vegas Strip has seen a drop in gaming revenues over the past few months and this will not bode well for the casino operators, such as Wynn Resorts (NASDAQ:WYNN). Lower Baccarat volume has been the primary reason for this fall. In fact, Baccarat wagering is down 14%, while revenues from the game have declined 18% in the first 10 months of 2015 (as per the latest data available). ^[1] Lower Baccarat volume points towards a weaker Chinese market and it has impacted the outbound travel to the U.S. The Mainland China economy and government’s anti-corruption campaign is affecting Chinese high rollers even outside of Macau and this has resulted in lower Baccarat volume in the state of Nevada.  Having said that, slot games in Nevada have seen some growth over the past few months. The overall win amount grew over 3% for the 12-month-period ending October 31, 2015. ^[1] Wynn’s Las Vegas slot revenues haven’t seen any significant growth in the past 3 years, while Macau gaming is struggling amid government’s anti-graft measures and a weakening economy. However, the company is likely to see significant growth in the coming years, primarily due to the opening of new resorts in Cotai, Macau and Everett, U.S. Also, the arrival of skill-based slot machines will likely help the company grow its reliance on slot over baccarat. On that note, we discuss below Wynn’s slot business in the U.S. and Macau and our estimates for them.

See our complete analysis of Wynn Resorts’ stock here

Enhanced Capacity And Changing Trend In The Gaming Industry Will Likely Bode Well For Wynn’s Slot Machine Operations

We estimate that the slot machines account for more than 10% to Wynn’s stock value. The company’s Las Vegas slot revenues have grown at an average annual rate of 6% since 2010, and the figure stood at $186 million in 2014. ^[2] This growth can be attributed to higher slot win per unit per day, which grew at an average annual rate of over 15% during the same period, according to our estimates. However, this growth was partly offset by a decline in number of slots at Wynn Las Vegas. The company currently offers around 1,860 slots at its Las Vegas properties and it plans to have 3,000 slots at its Everett casino. This will provide a significant upside to Wynn’s Las Vegas slot revenues and we estimate the figure to be north of $600 million by the end of our forecast period (towards 2022).

We believe that skill based slot machines and declining baccarat will both be positive for Wynn’s slot operations at the Strip. Looking at the overall market, baccarat continues to be the most popular table game and accounts for close to 50% of table games revenues across the Las Vegas Strip. Given the concerns in China, baccarat volume has been lower even at the Strip. The baccarat drop at the Las Vegas Strip declined 18% in 2014 to $11.4 billion and it likely fall below $10 billion in 2015, according to our estimates. This can partly be attributed to the changing trends in the gaming industry. Players now prefer to have some control over the game (unlike Baccarat) and they are inclining towards other skill-based games. In addition, casinos are now including skill-based slots to their offering. While baccarat and other table games will continue to be a significant contributor to casino revenues, its overall share is likely to come down with the arrival of skill-based slots.

Moreover, the company’s new casino in Everett will significantly enhance Wynn’s slot capacity in the U.S. Looking at Massachusetts, it is an important location with a per capita income that is $8,399 higher than the average U.S. per capita income. Boston is the largest city in Massachusetts and it is well connected with other major cities in the state and region. The new casino will thus have a geographic as well as demographic advantage for Wynn.

Also, the macroeconomic environment in the U.S. is an important factor for the overall gaming demand. The U.S. per capita disposable income is expected to grow from $37,352 currently to $43,312 in 2020, according to a research we have previously cited from IBISWorld.  As the U.S. economy grows and per capita disposable income increases, consumer spending on leisure, including gaming and entertainment, will also rise. This will aid the overall casino demand.

Looking at Macau, slot revenues have grown at an average annual rate of 12% since 2010 to $265 million in 2014, representing around 14% market share in Macau slot gaming. The company currently offers close to 700 slots at Wynn Macau and will likely double its capacity with Cotai resort. Accordingly, we estimate Macau slot revenues to be north of $400 million by the end of our forecast period, translating into over $1 billion in slot revenues and $330 million in estimated EBITDA across Wynn’s properties. In the near term we expect a decline in Macau gaming revenues amid government’s anti-graft measures and a weakening economy.

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1. Gaming Revenue Report, Nevada Gaming Commission [↩] [↩]
2. Wynn Resorts’ SEC Filings [↩]