Monday, March 12, 2007

Calls of Note Part 2

- Morgan Stanley says that after Macau's '06 gaming revenue restatement and firm's latest trip to the market last week, they believe there is more risk to the Macau stories, and have adjusted their gaming forecasts. As a result, the firm has reduced their price targets for LVS ($93 to $88) and WYNN ($112 to $104). They're still Macau believers, but the restatement, along with very high expectations and continued concerns about how the Street is tying its market forecasts to its company forecasts, causes them to believe that there is more risk to the numbers. This could play out with continued downside margin surprises when companies report their results, as was the case for 4Q06. When looking at company/market results and forecasts, investors should ask, "Where is the growth coming from?" The answer will determine the viability of margin and earnings forecasts.

Several weeks ago, the Macau government restated the '06 gaming numbers. While the total revenue is the same, the mass vs. VIP split shifted dramatically towards VIP. Avg mass market spend/visitor/day went from up 14% in '06 prior to the restatement to down 1%. With a higher percentage of VIP revenues, the implied market EBITDA is lower, as VIP revenues carry 15% avg margins, while mass market margins avg around 35%.

Notablecalls: Expect to see some early weakness in both of the mentioned names.

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