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WYNN 2Q2012 PREVIEW

We're below the Street but so is the whisper 

 

 

While we're below the Street, we're not making a negative call into the Q.  WYNN has fallen 28% since April 27th (shortly after they reported 1Q12 results) and is 44% off its 52 week high.  Last week, at least five analysts slashed their estimates for Wynn and many of the other Macau names.  Wynn Resort’s stock is now trading at less than 9x 2013, and that’s before any consideration for Wynn Cotai (although it does assume that the 24MM Okada shares stay “redeemed”).  We are the first to acknowledge that valuation doesn’t always matter with the Macau names, but this is about as cheap as the company has traded in some time. 

 

We estimate that Wynn Resorts will report $1.28 billion of net revenue and $367MM of EBITDA, 5% and 6% below the Street, respectively.  WYNN could actually beat the new lower estimates for 2H12 and even 2013 looks reasonable.  July market share has already improved considerably and June was better than May.  While we aren’t ready to go long the Macau names until a positive catalyst emerges, valuation suggests that downside from here, while possible and likely probable, could be limited. 

 

We estimate that Wynn Macau will produce $910MM of net revenue and $283MM of EBITDA (5% below consensus)

  • Net casino revenue of $853MM
    • $587MM of net VIP win
      • Assuming 10% direct play, RC volume of $30.8BN
        • Down 6% YoY—the first YoY decline since 2Q09; and
        • Down 8% QoQ—the first QoQ decline since opening
      • 2.74% hold
      • Rebate rate of 84bps or 30.5% on a rev share basis
      • The properties historical hold rate since opening has been 2.93%.  If Wynn held at its historical hold rate in 2Q, net revenues and EBITDA would be $41MM and $10MM higher, respectively
    • Mass win of $202MM, a 5% YoY increase but a 6% sequential decline
    • Slot win of $64MM, down 14% YoY and 13% QoQ
  • $58MM of net non-gaming revenue
    • Room revenue:  $29MM
    • F&B:  $25MM
    • Retail & other:  $50MM
    • Promotional allowances:  $49MM
  • $500MM of variable expenses
    • $433MM of taxes
    • $58MM of gaming promoter expense assuming a blended commission rate 42.7%
    • Recorded non-gaming expenses of $20MM
  • Fixed expenses of $108MM, flat QoQ and up 6% YoY

We’re projecting $366MM of net revenue and $100MM of EBITDA for Wynn Las Vegas (8% below consensus)

  • Net casino revenue of $130MM and operating margin of $67MM
    • Table win of $112MM
    • 5% increase in table drop to $561MM
    • 20% hold rate
    • $42MM of slot win
    • 1% increase in drop to $692MM
    • 6.1% win rate
    • $25MM discounts & rebates or 16% of gross casino win (compared to 18% in 1Q)
    • Casino expenses of $72MM, up 3% YoY and 9% lower QoQ
  • $278MM of non-gaming revenue
    • Room revenue of $89MM
    • RevPAR:  $206 (ADR: $252/ Occ: 82%)
    • CostPAR:  $85.26
    • F&B:  $108MM revenues at a 42% operating margin
    • Entertainment, retail, & other:  $60MM at a 37% operating margin
    • $42MM of promotional spending or 32% of casino revenue
  • SG&A:  $48MM (compared to $47MM last quarter)

Other assumptions:

  • Corporate expense:  $16MM
  • D&A:  $92MM
  • Stock comp:  $6MM
  • Net interest expense:  $76MM

XLK: Cautious On Tech

Apple (AAPL) excluded, tech stocks look awful right now. Apple continues to churn along but should it break TREND support at any time, the sector will go to hell in a handbasket very quickly. The Technology SPDR (XLK) is trading below its TRADE and TREND lines of support and could easily break its TRADE support this week.

 

While technology isn’t as bad as industrials (mostly thanks to Apple), it’s a sector to keep an eye on should the market trend weaker.

 

 

XLK: Cautious On Tech  - XLK techbreakdown


CHART DU JOUR: NOT AN EASY PATH BACK TO PEAK

The modest Strip recovery is moderating


  • Higher margin slot volume growth now trending negative
  • Lower highs was already the trend but YoY moving average also negative
  • Baccarat has been the growth driver in tables but with Chinese growth slowing, the gains will be more and more difficult to achieve

 

CHART DU JOUR:  NOT AN EASY PATH BACK TO PEAK - gg


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HST YOUTUBE

In preparation for HST's 2Q earnings release tonight, we’ve put together the recent pertinent forward looking company commentary.

 

 

1Q CONFERENCE CALL YOUTUBE (April 25)

  • "Our strong first quarter performance combined with the robust group booking paid for the remainder of the year gives us confidence to raise our full year guidance. We feel very good about the fundamentals of the business and our outlook for the remainder of the year."
  • "We believe this positive cycle will gain momentum through the remainder of this year and into 2013, an increase in demand combined with projected low supply growth in our markets of roughly 0.5% in 2013 and 2014, should support a solid and sustained recovery."
  • "Group bookings for the remainder of the year surge by more than 13% compared to the prior year and are now approximately 7.5% ahead of last year's pace for the remaining three quarters and meaningfully positive in every quarter. The average rate for these bookings is up approximately 2% and our recent bookings have exceeded last year's rates by more than 8%. Both trends bode well for the future."
  • "Our transient bookings also continue to run well ahead of last year's levels and suggest strong rate growth. The combination of these trends suggests that we should continue to see improvements in occupancy in 2012, which will ultimately drive higher rates and additional mix shift. We are also seeing positive group booking activity extend into 2013, indicating that our group hotels, which lag during the early stages of this recovery, are now benefiting from increased business spending."
  • "We would expect to be a net buyer this year, but we intend to remain disciplined. If pricing levels move too high, we will look to take advantage by accelerating our sale activities. Given the unpredictability of the timing of these transactions, our guidance does not assume any additional acquisitions or dispositions this year beyond what we have already announced."
  • "We continue to find construction pricing attractive and expect these investments will yield returns substantially in excess of our cost of capital. Through the full year, we expect to spend approximately $150 million to $170 million."
  • "In terms of maintenance capital expenditures, we … expect to spend $300 million to $330 million for the full year."
  • 2012 guidance: 
    • Comparable hotel RevPAR guidance to 5% to 7%
    • On the margin side, even given that occupancy growth is still making a meaningful contribution to RevPAR growth, we believe we can drive incremental profitability and strong flow through. We expect to increase margins 50 to 100 basis points
    • Adjusted EBITDA in the range of $1.120 billion to a $1.165 billion
    • Adjusted FFO per share of $1.01 to $1.08
    • Dividends for the remainder of the year will depend on both operating results and gains on asset sales.
  • US market outlook:
    • "We expect Philadelphia to be a top-performing market in the second quarter due to strong group demand, which should allow us to drive pricing."
    • "We expect our Chicago hotels to continue to perform very well in the second quarter due to strong group and transient demand."
    • "We expect our Hawaiian properties to underperform our portfolio in the second quarter, but having good second half of the year."
    • "We expect our Houston hotels to underperform our portfolio in the second quarter, due to an unfavorable comparison to the first quarter of 2011 when the City of Houston hosted the NCAA Men's Final Four."
    • "We expect our Miami and Fort Lauderdale hotels to continue to perform well in the second quarter."
    • "We expect our Los Angeles hotels to continue to perform well in the second quarter due to strength in both group and transient demand."
    • In 1Q, "Our New York hotels... were negatively impacted by the second and final stage of the rooms renovations at the New York Marriott Marquis and the Sheraton New York Hotel & Towers, meeting space renovations at the W New York and a rooms renovation at the W Union Square. We expect our New York hotels to have a good second quarter."
    • "2012 will be a challenge in D.C. due to a weaker city-wide calendar, government travel cutbacks and a lack of legislative activity, which reduces demand. We expect the second quarter will be better, but still underperform our portfolio."
    • "We do expect our San Antonio hotels to perform better in the second quarter but to continue to underperform our portfolio."
    • "Atlanta was actually up 4.9%. Very good group, city-wide demand. We actually expect an even better second quarter. We've got really good group and transient pace on the books. And then for the rest of the year it will basically end up about where it was in the first quarter."
    • "Inbound travel to the euro zone from the U.S., U.K., Asia and the Middle East continues to be strong and is a major source of euro lodging demand. The Westin Europa & Regina in Venice, the Sheraton Warsaw, the Sheraton Skyline in London and the Paris Versailles, all had double digit RevPAR increases for the quarter."  
  • "Looking to the rest of 2012, we expect that RevPAR will be driven by both occupancy and rate growth but rate growth will be increasingly more important throughout the year. The additional rate growth should lead to solid room flow through even with growth in wage and benefit cost. We expect the positive trends in group demand to continue particularly in the second and fourth quarters which will help drive growth in banquet and audio-visual revenues and good F&B flow through. We expect unallocated cost to increase more than inflation particularly for rewards in sales and marketing where higher revenues will increase cost. We also expect property taxes to increase roughly 8%, the utilities to increase between 1% and 2% for the year."
  • "As we look overall for the full year what we're seeing at this point now is that our overall booking pace for the full year is up actually about 8.5% on a revenue basis for the full year. But that is much stronger for the last three quarters of the year than it was for the first part. So actually if you look at the last three quarters of the year, we are running – on the revenue basis, we're running in the 9.5% to 10% area. That gets comprised of a high 7% increase in room nights combined with a couple of percent in rate. "
  • "Overall, the larger hotels are probably seeing a little bit less of their business coming from group right now than they have in the past. I think they're getting the rate because they are well located in markets that are recovering quickly, which in part accounts for the differential in rate. But, we've not recovered close yet to our prior levels of group activity, you haven't quite seen the same level of group business at those larger hotels.
  • "We're seeing some… bigger increases in the smaller hotels than we are seeing in the larger hotels. We're seeing significantly good, strong increases in both. But, I think part of that comparison, you need to understand that the smaller hotels tend to book a lot of their business fairly short term.  Part of what we're encouraged by when we look at the larger hotels is the fact the association business is better, corporate group is better. We're hearing signs from our operators that the associations are thinking in terms of bigger events, both in days and attendance, as they look out into 2013 and 2014 and beyond. So, I think there's a confidence in the larger groups that they're going to hold bigger events as opposed to smaller events looking outward. That will clearly benefit the larger hotels."

JPM: The Good, The Bad and The Ugly

JP Morgan (JPM) reported its second quarter earnings last week while still reeling from the London Whale trading loss (now amounting to $5.8 billion). Profits fell 9% and one of the worst trades of all time could balloon to $7 billion.

 

But the real story here isn’t the London trading loss. There are other gears in motion that do not help JP Morgan out in the long run. The LIBOR scandal that continues to plague the industry will soon spill over to JPM (along with Citigroup and Bank of America) and overall weakness in capital markets is a sign of the times.

 

 

JPM: The Good, The Bad and The Ugly  - JPM Q2chart1

 

 

Revenues are coming under pressure and expenses are growing. The efficiency ratio is the total expenses as a percentage of total revenue – take a look at the chart we’ve provided for the full story. Expenses are catching up and quickly. The stock was up 5 to 6% on Friday. We look at the results and are asking: are they really that great? They cut guidance. Four months ago at investor day, they said that operating expenses would fall 1 to 2% in the back half of 2012. Now they say that they’re going to be flat.

 

 

JPM: The Good, The Bad and The Ugly  - JPM Q2chart2

 

 

The story here is that while JPM is cheap relative to earnings, the company (and industry) as a whole faces significant challenges in the back half of the year. The data says it all.

 

JPM: The Good, The Bad and The Ugly  - JPM Q2chart4


European Banking Monitor: ESM Delay = Enhanced Uncertainty

Below are key European banking risk monitors, which are included as part of Josh Steiner and the Financial team's "Monday Morning Risk Monitor".  If you'd like to receive the work of the Financials team or request a trial please email .

 

Key Takeaways:


* European bank swaps were a mixed batch last week. German, Spanish, and French banks saw broad tightening last week while Italian and Greek banks widened. Sovereign swaps moved alongside bank swaps this week with most European countries tightening except for Ireland. US Bank swaps were generally uneventful last week. 

 

Today there was an important announcement from Germany’s Constitutional Court that a ruling on the ESM and Fiscal Pact is set for September 12th. The runway of this lack of clarity on the scope of the ESM, especially the mandate for bank recapitalization lending, is hugely unsettling as market participants continue to want answers to a Eurozone "fix" yesterday. We’re forecasting that risk premium reflecting sovereigns and their banks could swing massively based on headline risk until more clarity is reached.

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 If you’d like to discuss recent developments in Europe, from the political to financial to social, please let me know and we can set up a call.

 

Matthew Hedrick

Senior Analyst

 

(o)

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European Financials CDS Monitor Spanish banks tightened a lot while French banks tightened a little. Italian banks were a bit wider while Greek banks widened a lot. Overall, 20 of the 39 European financial reference entities we track saw spreads widened last week.

 

European Banking Monitor: ESM Delay = Enhanced Uncertainty - dd. banks

 

Euribor-OIS spread – The Euribor-OIS spread tightened by 3 bps to 38 bps. The Euribor-OIS spread (the difference between the euro interbank lending rate and overnight indexed swaps) measures bank counterparty risk in the Eurozone. The OIS is analogous to the effective Fed Funds rate in the United States.  Banks lending at the OIS do not swap principal, so counterparty risk in the OIS is minimal.  By contrast, the Euribor rate is the rate offered for unsecured interbank lending.  Thus, the spread between the two isolates counterparty risk. 

 

European Banking Monitor: ESM Delay = Enhanced Uncertainty - dd. euribor

 

ECB Liquidity Recourse to the Deposit Facility – This index fell sharply from precipitous heights on the first day that the new 0.00% deposit rate went into effect.  The ECB Liquidity Recourse to the Deposit Facility measures banks’ overnight deposits with the ECB.  Taken in conjunction with excess reserves, the ECB deposit facility measures excess liquidity in the Euro banking system.  An increase in this metric shows that banks are borrowing from the ECB.  In other words, the deposit facility measures one element of the ECB response to the crisis.  

 

European Banking Monitor: ESM Delay = Enhanced Uncertainty - dd. facillity

 

Security Market Program – For the eighteenth straight week the ECB's secondary sovereign bond purchasing program, the Securities Market Program (SMP), purchased no sovereign paper for the latest week ended 7/13, to take the total program to €211.5 Billion. Could this position of hold change? We think the ECB has to take a larger role to buy Europe’s sovereign peripheral paper. We’ll be looking to this Thursday’s ECB meeting for any information on a change of positioning.

 

European Banking Monitor: ESM Delay = Enhanced Uncertainty - dd. SMP


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