Has Wynn Resorts, Limited (WYNN) Bottomed Out? A look at Both Pros and Cons
Wynn Resorts, Limited (NASDAQ:WYNN) is one of the few stocks that lost two-thirds in a year. That is primarily because of China and its control over the gaming environment in the Macau region. Also, the stock lost about 40% after the second biggest world economy devalued its currency in August. The crackdown and the effects are still to die down. The establishment appears to be firm in reducing illegal activities attached to the gaming sector. Everyone was expecting that the tightened noose would be slowly loosened in the last few quarters. However, that is not happening. That meant continued struggle for the whole of the industry and the company. Every time the stock is seeing its weakness, there was a sense of belief that the stock has bottomed out. Has it really bottomed out now to reverse the trend? Let’s look at the pros and cons to decide further.
Sell Side Thesis Increases
In the most recent second quarter, Wynn Resorts, Limited (NASDAQ:WYNN) suffered a total revenue drop of 26%, while revenue from Macau plunged 36% on a year-over-year basis. Its EBITDA also fell 36%, hurt by erosion in the margin. Even before the currency devaluation too, its revenue was witnessing a double digit drop while casino revenue plummeted 77% of the total revenue. That naturally alarms the investors since revenue from the casino was key to the company. That was because all other revenue, be it rooms or food or entertainment, were derived from casino only. Gambling has attracted a lot among most other services and its margin was also high.
Macau is a key region for all casino operators. Its performance will dictate the results of most of the companies’ results with exposure to casino games. Wynn Resorts, Limited (NASDAQ:WYNN) gets only 60% of its revenue from China. Top line growth was mainly driven by influential high rollers. Until a year ago, having a presence in Macau was like an insurance. However, currently over exposure might become harmful to the company’s quarterly or yearly numbers. In fact, it is now treated as a negative factor. Until August, Macau witnessed its 14th straight monthly revenue drop from gaming. Fitch sees gaming revenue from the region to drop 34 – 35% on an annualized basis. That was in line with the second quarter results of the company.
There is also not much hope in the days to come since the PMI Index for September, as well as economic expectations for the current year have the potential to fall further in China. That would mean high rollers will continue to shun the gaming sector. As a result of a drop in revenue, other factors also get affected. For instance, EBITDA margins slipped to 26% of the second quarter revenue from 30%. Wynn Resorts, Limited (NASDAQ:WYNN) stock might appear cheaper than what it was three months back. However, it is difficult to predict whether it is cheaper even after dropping two-thirds from the yearly high price of the stock.
The Advantage Of Buying The Shares
The gaming company controls the luxury, as well as the high end of the niche casino industry. As a result, it enables them to generate the highest revenue, as well as EBITDA in the industry. The company enjoys the long-standing brand value in the casino and resort market, having entered the scene long back. Wynn Resorts, Limited (NASDAQ:WYNN)’s designs stuck to the stunning higher-end amenities, which attracted the discerning upper class. Its Chairman and CEO Steve Wynn’s, focus on high quality started with the Bellagio, as well as the Mirage in Las Vegas. The two resorts were considered the most lavish casino resorts and continued the positions. Currently, the company is holding more Forbes five star awards compared to any other independent hotels in the world. It also enabled it to attract the high rollers, apart from generating 30% more EBITDA over the next highest earning property in Las Vegas.
The company is well placed to take advantage of the growth opportunity of Macau in the long-term. That was because 70% of EBITDA came from the region, besides enough space to expand room share as it is planning to unveil Cotai Palace in the first half of the next year. That will position it on Macau’s more trafficked area. The property will add its room supply by 1,700, resulting in increasing its share to 9% from the current 6%. Macau will attract more traffic due to the eight fresh casino openings, as well as infrastructure dollars, which is being predicted to pour until 2017. Wynn Resorts, Limited (NASDAQ:WYNN)’s new palace is predicted to double China region’s EBITDA in 2017.
On the sell side thesis, the company’s shares were trading close to 11x run-rate EBITDA with the enterprise valuation of $17 billion. Given the continued drop in revenue generation, margin erosion, and the volatility of the stock, there is no guarantee that the stock has bottomed out. It has further potential to fall.
On the buy side thesis, Morning star has accorded five-star rating on Wynn Resorts, Limited (NASDAQ:WYNN) shares with a fair value of $152. It also suggested considering buying the company’s shares at $91.20. That means any price below the $91 level can be termed a good buying price. Now, the stock is trading a little over $60. Morningstar recommended sell at a price of $235.60.
Based on the results in the last one year, one might come to a conclusion that the revenue will continue to fall in Macau impacting the results of Wynn Resorts, Limited (NASDAQ:WYNN). However, once the company unveils its new Palace in China next year, its revenue and profit will grow. None-the-less, the hangover of Macau will continue to be there. Shares of the company can fall further. However, if investors are ready for long-term risks, then this is a stock to buy.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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