Value-focused investors are always on the lookout for undervalued stocks with the potential for substantial returns. Wynn Resorts Ltd (WYNN, Financial), a premier name in luxury resorts and casinos, appears to be a candidate for such an investment with its stock price at $85.49, reflecting a day's loss of 5.69% and a 3-month decrease of 17.75%. According to the GF Value, the fair value of Wynn Resorts (WYNN) is estimated at $150.08, suggesting a significant undervaluation. Yet, the question arises: is this a genuine discount or a value trap in disguise?
Understanding the GF Value
The GF Value is an exclusive GuruFocus valuation method that determines the intrinsic value of a stock. It is calculated based on historical trading multiples such as PE, PS, PB ratios, and Price-to-Free-Cash-Flow, adjusted for the company's past performance and growth, as well as future business performance estimates. The GF Value Line serves as a benchmark, indicating a fair trading value for the stock. While a stock price below this line could indicate an attractive investment opportunity, it is crucial to perform a thorough analysis before making any decisions.
Despite Wynn Resorts's appealing valuation, several risk factors warrant caution. With an Altman Z-score of 0.93 and a five-year trend of declining revenues and Earnings Per Share (EPS), investors are faced with the critical decision of determining whether Wynn Resorts (WYNN, Financial) is a hidden gem or a value trap. These indicators suggest that despite its apparent undervaluation, Wynn Resorts might be a potential value trap, emphasizing the importance of comprehensive due diligence in investment decisions.
Decoding the Altman Z-Score
Before delving deeper, it is essential to understand the Altman Z-score, a financial model developed by Professor Edward I. Altman in 1968. This score predicts the likelihood of a company facing bankruptcy within two years by combining five financial ratios. A score below 1.8 indicates a high risk of financial distress, which is currently the case with Wynn Resorts, signaling potential trouble ahead.
An Overview of Wynn Resorts
Wynn Resorts operates four megaresorts, with the majority of its 2019 pre-pandemic EBITDA generated from its Macau and Las Vegas locations. The company is poised to expand with a new building next to Wynn Palace in Macau, expected to open around 2027. Additionally, Wynn Resorts runs a digital sports betting and iGaming platform. However, the company's financial health, indicated by its low Altman Z-score and declining retained earnings to total assets ratio, raises concerns about its future performance.
Wynn Resorts's Low Altman Z-Score: A Breakdown of Key Drivers
Analyzing Wynn Resorts's financial health, the Retained Earnings to Total Assets ratio shows a concerning trend, with figures dropping from -0.17 in 2021 to -0.23 in 2022, and -0.21 in 2023. This decline reflects the company's decreasing ability to reinvest in its operations or manage debt effectively, negatively impacting the Altman Z-Score and suggesting financial fragility.
Warning Signs: Declining Revenues and Earnings
Wynn Resorts's revenue per share and 5-year revenue growth rate have been on a downward trajectory, with the latter at -15.7%. This decline in revenues per share, from $61.98 in 2019 to $50.45 in 2023, indicates potential challenges such as reduced demand or increased competition. These factors are critical for investors to consider as they could significantly affect the company's future performance.
The Red Flag: Sluggish Earnings Growth
Despite its low price-to-fair-value ratio, the falling revenues and earnings of Wynn Resorts cast doubt on its attractiveness as an investment. A low price relative to intrinsic value can signal an opportunity, but this assumes the company's fundamentals are solid or improving. For Wynn Resorts, the decline in revenues and earnings suggests deeper issues that may not be resolved by cyclical changes alone. Without a clear path to recovery, the company's downturn may persist, making the low price-to-GF-Value ratio a potential sign of a value trap rather than an opportunity.
Considering the low Altman Z-Score, declining retained earnings ratio, and falling revenues and earnings, Wynn Resorts presents several red flags that investors should not overlook. These indicators point to the possibility of Wynn Resorts being a value trap rather than a value buy. It is essential for investors to conduct thorough research and consider the company's financial health and market position before making an investment decision. For those seeking to avoid such pitfalls, GuruFocus Premium members have access to tools that screen for stocks with high Altman Z-Scores and good revenue and earnings growth, aiding in the identification of more secure investment opportunities.
Is Wynn Resorts merely facing a temporary setback, or is it ensnared in a value trap? This is the critical question that investors must answer with careful consideration and due diligence.
GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen. Investors can find stocks with good revenue and earnings growth using GuruFocus' Peter Lynch Growth with Low Valuation Screener.
This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.