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Gaming Guru

Rod Smith
 

Gaming Stocks: Rating of Wynn Lowered

10 May 2005

Goldman Sachs Group on Monday downgraded its rating on Wynn Resorts Ltd., citing jitters about the gaming industry in general and the owner of the Strip's latest megaresort in particular.

"From a coverage standpoint, this is our least-favorite industry and we want to reduce our exposure to (the gaming) sector," Goldman Sachs gaming analyst Steve Kent said in an investor advisory that lowered the company's rating on Wynn Resorts stock to "in line" from "outperform."

Kent declined to explain his concerns about the gaming industry.

The Wynn Resorts downgrade didn't seem to dampen the day for Las Vegas-based casino operator stocks -- eight of 10 local companies posted gains; just two fell. The Dow Jones U.S. gaming index also advanced slightly on Monday, closing at 456.24, up 0.17 points, or 0.04 percent

Brian Gordon, a partner in Applied Analysis, a Las Vegas-based financial consulting firm, said the gaming market has been as hot as any in the country for at least 12 months, and "expecting that trend to continue was unrealistic."

Recent concerns about the economy and a possible slowdown are driving investors away from leisure-related stock investments, he said.

"Potential consumers of the Las Vegas gaming product are national and international visitors and their economic condition is going to impact the sector directly," Gordon said.

Kent said that because of the mixed messages out of Macau, such as decelerating monthly trends and unimpressive Las Vegas Sands results, Goldman Sachs wants to reduce its exposure to the more "speculative" companies in the gaming industry, such as Wynn Resorts.

However, Deutsche Bank analyst Marc Falcone said it is difficult to find a business with stronger consumer fundamentals than gaming.

"Overall, we believe the gaming industry is in this environment where people are concerned about the economic climate, oil prices and slowing growth, but the gaming industry is more resistant than others to those fears," he said.

Susquehanna Financial Group gaming analyst Eric Hausler said Las Vegas continues to be a strong market, and a number of companies, especially slot manufacturers whose stocks have been tumbling, remain good investments.

"As long as Las Vegas is doing well, values should hold up. If Vegas slacks off, stocks may go down," he said.

Kent said Goldman Sachs' earlier rating on Wynn Resorts shares was based on factors such as the April 28 opening of the $2.7 billion Wynn Las Vegas resort; the announcement of Encore, the second phase of the project; and the release of Macau gaming data that has already been discounted by the stock market.

Now, however, he said Wynn Resorts represents one of the more "speculative" companies in the group.

Wynn Resorts has yet to start construction on Encore, complete construction on its Macau development or be selected to build a casino in Singapore. Wynn Las Vegas is the only element in the company's plan that is generating revenue, cash flow or profits.

In addition, since it just opened last month, there are no market data on the company's long-term profitability.

Shares in Wynn Resorts peaked in mid-March at $76.45, up 99.9 percent from $38.25 a year earlier and up 123.7 percent from its 52-week low of $34.18 on Aug. 16.

Wynn Resorts closed Monday at $47.61, down 81 cents, or 1.67 percent, on 4.2 million shares, double normal trading volume. Wynn Resorts' share price is down 37.7 percent from its all-time high two months ago.

"With the increased interest and hype associated with the opening of a major resort of this magnitude, Wall Street interest tends to peak ahead of the opening," Gordon said.

Falcone took issue with concerns about Wynn Resorts.

"You'd be hard-pressed to find a company that will ramp cash flow up any faster than these guys," he said. "Long-term, investors are going to be significantly rewarded by investing in Wynn Resorts, with Macau, Encore and the golf course redevelopment coming online."