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December 18, 2014

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Wynn defies Wall Street ‘wisdom’

Despite tough times, he keeps spending, thinking long term

Around the time MGM Mirage was trimming its management ranks and the tourism slowdown — only hinted at in research statistics and earnings reports — had become a hard fact in Las Vegas, competitor Steve Wynn was playing it cool.

His business strategy, he said, wouldn’t shift to suit Wall Street’s whims.

The man who built his career constructing and operating the most expensive, highest-end casinos in town wouldn’t be cowed into cheapening his resort with significant cost cutting to please short-term investors. He called these Wall Street investors “nitwits.”

Wynn’s company isn’t immune to economic downturns, of course, and he warned Wall Street last week that second-quarter operating profits at Wynn Las Vegas would be down about 27 percent from a year earlier, while room revenue and room rates are expected to decline modestly. He was the first of the major Las Vegas casino operators to reveal details about second-quarter operating performance — news that’s highly anticipated amid the tourism decline.

By issuing such a warning, a rarity for Wynn Las Vegas, the company signaled it’s willing to take hits in the short term for long-term gains.

Coming from Wynn, it also sounded like something of a dare.

“I’d love to see these guys dump the stock,” he said.

In fact, the earnings news turned into a boon for Wynn. Analysts had feared the worst after the bloodbath detailed earlier that day by the Gaming Control Board, which reported Strip casinos won 16 percent less from gamblers in May than a year earlier. That’s gambling revenue before taxes and other expenses, by the way.

Wynn’s numbers (and especially for Wynn Macau, which is up an impressive 70 percent in operating profit in the second quarter compared with a year earlier) didn’t look so bad in that light, and his stock gained more than $8 per share on the news, boosting other gaming stocks.

Along with the earnings announcement, Wynn’s board authorized the repurchase of $500 million in shares on top of the more than $400 million in shares the company has repurchased over the past year. Before Thursday’s news, the board had authorized the repurchase of $1.2 billion in stock.

Share buybacks are a clear indication that management thinks its stock is undervalued. But the buyback seems to have been overshadowed by Wall Street’s negative outlook on the gaming industry in Las Vegas.

Wynn isn’t the only casino executive whining about Wall Street, though he has been the most public with his criticism.

He has long said Wall Street doesn’t understand the casino business, which requires spending uncomfortably large sums of money and repeating the process for years to yield returns. Splurging is smart investing when you’re in the entertainment business, or more specifically, the gambling resort business, he says.

His strategy has put him at odds with Wall Street in the past.

MGM Mirage became a Strip powerhouse after the 2000 acquisition of Wynn’s Mirage Resorts for the now bargain price of $6.4 billion. Kirk Kerkorian pounced on Mirage’s stock, which was on the decline because of Wall Street’s negative response to Wynn’s expensive Beau Rivage resort in Mississippi, among other spending sprees.

As he was preparing to build Wynn Las Vegas, Wynn wanted to avoid tapping the public markets so he wouldn’t have to kowtow to Wall Street. But he relented and ended up with a respectable public stock offering during a difficult time for initial public offerings.

He has profited immensely from that decision. Even after major declines in gaming stocks, Wynn Resorts is expected to trade at more than 10 times the company’s earnings this year, according to investment house Deutsche Bank.

As the analyst reports generated by Wall Street have grown more bearish on gaming, Wynn’s patience with the pinstripe crowd — which is doubtful on the best of days — appears to be wearing thin.

“I don’t care what Wall Street thinks,” Wynn said in April, after the MGM Mirage layoffs, which helped to appease shareholders. “I run the business for long-term growth. This place is not run by short-term-thinking people, which is a really good reason to ignore them.”

Wynn Las Vegas, which opened in 2005, escaped the post-9/11 downturn and, as one of the Strip’s newest resorts, is better positioned to withstand the toughest times yet in the modern resort era. Wynn’s track record indicates he’ll likely find a way to profit amid the decline, while blasting doubters every step of the way.

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