Wynn Resorts WYNN reported weak first-quarter results, as the company continued to perform poorly in Macau due to intensifying competition from new casinos on the Cotai Strip. Revenue and EBITDA were above consensus estimates, but only because the company had an unusually high hold rate for VIP table games in Macau and table games in Las Vegas.

Revenue increased 5% to $1.38 billion (compared to consensus of $1.37 billion) and adjusted property EBITDA increased 15.5% to $451.1 million (compared to consensus of $412.4 million). However, on a normalized hold basis, revenue declined 3.4% to $1.27 billion, and adjusted property EBITDA declined 12.8% to $340.7 million. This performance isn’t enough to prompt us to change our narrow economic moat rating or fair value estimate of $190 per share, since we already had built a loss of market share into our financial model. However, we’re reassessing our “stable” moat trend rating, given our revised expectation that the company’s planned Cotai Strip casino will not open until after Melco Crown MPEL completes construction of its Studio City project, and Galaxy Macau completes a major expansion in 2015. Wynn Cotai isn’t projected to open until early 2016.

While we view Wynn as undervalued on a discounted cash flow basis, with the stock trading at a near 30% discount to our fair value estimate, our bias towards a narrow economic moat trend rating prevents us from recommending that investors buy the stock at current levels. We think investors should seek a wider margin of safety before initiating a position in these shares.

Revenue for Wynn Macau increased 4.4% to $992.1 million (significantly underperforming the overall market, which grew 14.6% in the fourth quarter) and adjusted property EBITDA increased 14.1% to $330.7 million. Adjusted for an unusually high VIP win rate of 3.14% (above the expected range of 2.7% to 3.0%), though, revenue declined by 4.3%, and adjusted property EBITDA declined by 14.3%. VIP table game turnover declined by 15.5% (comparing unfavorably to industrywide VIP gaming revenue growth of 9.8% in the first quarter).

The company performed more strongly in the mass market, with mass market table game win increasing by 13.6%, but the increase compared unfavorably with industrywide mass market gaming revenue growth of 29.7% in the first quarter. Wynn’s weak performance in Macau reflects its continued market share loss to new casinos on the Cotai Strip, most notably to Las Vegas Sands’ new Sands Cotai Central casino, which opened in April 2012. Sands Cotai expanded in size by over 2,000 rooms in the first quarter due to the opening of a new Sheraton Hotel tower, and received government approval to add another 200 gaming tables. We expect Wynn to continue to lose market share to Cotai Strip casinos until late 2013 or early 2014.

In the U.S. market, revenue for Wynn Las Vegas increased 6.6% to $386.6 million and adjusted property EBITDA increased 19.3% to $120.4 million, but the increase in revenue and EBITDA was driven by an unusually high table game win rate of 26.7% (above the expected range of 21% to 24%). On a normalized win rate basis, revenue and EBITDA declined by 1.3% and 8.8%, respectively. Table drop was up by 2.2%, but slot handle was down by 3.1%. The results in Las Vegas were below our expectations, and we have a cautious view for the remainder of the year due to a possible pullback in gambling spend per trip among Wynn’s high net worth customers.

During its earnings call, Wynn management discussed its pending bids for casino licenses in Boston and Philadelphia, and its Urban Wynn concept, which involves the pairing of a luxury hotel and high-end casino in city centers, and indicated that the licenses are likely to be awarded by the end of the year. We don’t have a favorable view of company’s recently developed interest in the regional casino market in the U.S., as we view the regional casino industry as mature and saturated. Management also discussed international opportunities it may pursue in Toronto, Japan, and Singapore, which we view as more attractive markets from the standpoint of offering more restrictive licensing environments, with the potential for higher returns on invested capital.