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Value Thoughts - Wynn Resorts, Ltd.

June 12, 2011 | About:
wax

wax

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Wynn Resorts, Ltd. (WYNN) is a Nevada corporation formed in June 2002, and led by Chairman and Chief Executive Officer Stephen A. Wynn. Management believes that Mr. Wynn is a leading developer, owner and operator of destination casino resorts and..."has developed brand name status". The company owns two destination casino resorts, the Wynn Las Vegas located in Las Vegas, Nevada and the Wynn Macau, located in the Macau Special Administrative Region of the People’s Republic of China.

Basis

Financial information presented herein, is based on the company's most recent SEC Form 10-K filing for year ending December 31, 2010, as filed with the Securities and Exchange Commission on February 28, 2011.

Short-Term Investment Considerations

The stock closed recently at $131.99, with first First Resistance at $141.42, a 7% increase from the recent close and Second Resistance at $151.73, a 15% increase from the recent close.

The stock price should find First Support at $116.42, a 12% decline from a recent close, and Second Support at $73.12, a 45% decline from a recent close.

Daily Relative Strength is currently 32, completing a correction from an oversold condition, so a move to the upside is expected. The upside move may prove to be a large jump with the news wires reporting that Standard and Poor's upgraded the company's credit rating from BB to BB+.

Regardless of the company's credit rating, with more room to the downside than the upside, we have no short-term interest in this stock at the present time.

Earnings Growth Valuation

Earnings growth valuations are based on the spread between year over year earnings growth and the current PE.

In the case of Wynn Resorts Ltd., the company had a year over year earnings growth of 39%, ending FY10 with earnings of $5.26 per share.

With a trailing twelve month PE of 25, the spread between earnings growth and the PE is about 1.5, meaning that for an investor focusing on earnings growth, the stock should be trading near $140.14, an $8.15 increase from a recent close.

Fundamental Investment Valuation

Liquidity: The company ended FY10 with a Current Ratio of 1.76, a Quick Ratio of 1.63, a Cash Ratio of 1.42, and a Cash Conversion Cycle of 5 days. In addition, Goodwill and Intangibles comprised less than 1% of Total Assets, and the company had a Book Value of $17.96 and a Tangible Book Value of $17.64.

Profitability: For FY10, the company had a Gross Margin of 36%, an Operating Margin of 20%, a Net Operation Margin After Taxes (NOPAT) of 8%, a Return On Invested Capital (ROIC) of 13%, and an Effective Tax rate of 6%.

Debt: For FY10 the company had Total Debt of $3.27 billion, a year over year decrease of 9%. Additionally, the company paid an average annual Interest Rate 6.82%, an almost 1% year over year increase, had a Debt to Cash Ratio of 2.6, and a Debt to Equity Ratio of 1.46.

Cash Flow: The company's FY10 Operating Cash Flow was $11.56 per share, a year over year decrease of 29%, and its Free Cash Flow was ($0.28), a year over year decrease of 146%.

Dividends: During FY10 the company paid a dividend of $9.57 per share, a 141% year over year decrease. Based on a recent close of $131.99, the Dividend Yield is 7.25%.

Fundamental Valuation: Based on our review of the company's latest annual financial information we think a Reasonable Value Estimate for the company is in the $33-$35 range.

Value Thoughts

We are not fans of the "one man show" concept that company management seems to have adopted, and wonder what would happen to the stock price should Mr. Wynn fall ill or otherwise not be able to guide the company.

We also believe the company has far too much debt. Certainly we understand the business the company is in and realize that a large amount of debt is normal. We also understand that if the news wires are correct, a change in the rating of the company's debt should reduce its debt service going forward. But in the end, debt at 3 times EBITDA simply implies too great an investment risk given the stock's recent close.

Considering a recent close of $131.99, an estimated Merger and Acquisition payback of 17.5 years (assuming EBITDA remains the same), a year over year earnings growth of 39%, as well as a year over year free cash flow decline of 146%, we think the stock is currently OVER PRICED, and not a candidate for additional research for the Wax Ink Portfolio..

Wax

Disclaimer

We have no position in Wynn Resorts Ltd., and no plans to initiate a position in the next 5 business days. Additionally, we have received no compensation to write about a specific stock, sector, or theme.

About the author:

wax
Wax Ink is a baseline equity research company not licensed or registered with any government agency

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