Value-focused investors are always on the lookout for undervalued stocks that promise substantial returns, and Wynn Resorts Ltd (WYNN, Financial) has caught the eye of many. With a current price of $84.94 and a 3-month decrease of 12.23%, Wynn Resorts (WYNN) appears to be trading below its GF Value of $156.17. However, the stock's recent performance, marked by a 2.44% loss in a single day, raises questions about its true valuation and potential as a value trap.
Understanding GF Value
The GF Value is a unique valuation metric that estimates the intrinsic value of a stock based on historical trading multiples such as PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow, adjusted for the company's past returns and growth, and future business performance estimates. The GF Value Line suggests a fair trading value for the stock, with the expectation that the stock price will oscillate around this line. Stocks trading significantly above the GF Value Line may be overvalued, while those below may offer higher future returns.
Despite the seemingly attractive price point of Wynn Resorts (WYNN, Financial), a deeper analysis is crucial before making an investment decision. The company's low Altman Z-score of 0.94 and a five-year downward trend in revenues and Earnings Per Share (EPS) prompt a critical evaluation: Is Wynn Resorts a hidden gem or a value trap?
The Altman Z-score and Financial Health
The Altman Z-score is a predictive financial model developed to assess the likelihood of bankruptcy within a two-year period. It combines five financial ratios to produce a score that flags potential distress, with scores below 1.8 indicating high risk and above 3 suggesting low risk. Wynn Resorts's low Z-score is a red flag for investors, signaling the need for a thorough examination of the company's financial stability.
Snapshot of Wynn Resorts
Wynn Resorts operates premier luxury casinos and resorts, with a history dating back to its 2002 founding by Steve Wynn. The company's portfolio includes four megaresorts, with significant EBITDA contributions from its Macao and Las Vegas operations. As investors consider Wynn Resorts's stock price in relation to its GF Value, understanding the company's business and financials becomes paramount in determining its investment potential.
Assessing Wynn Resorts's Financial Health
An analysis of Wynn Resorts's financial ratios reveals concerns about its financial health. The Retained Earnings to Total Assets ratio has shown a declining trend (2021: -0.17; 2022: -0.23; 2023: -0.21), indicating a diminishing ability to reinvest in the business or manage debt effectively, adversely impacting the company's Altman Z-score.
Revenue and Earnings: Warning Signs
Declining revenues per share and a 5-year revenue growth rate of -15.7% signal potential difficulties for Wynn Resorts, such as decreased demand or increased competition. These trends are critical for investors to consider, as they may affect the company's future performance and viability as an investment.
The Earnings Growth Dilemma
Despite Wynn Resorts's attractive price-to-fair-value ratio, its falling revenues and earnings overshadow its investment appeal. A low price relative to intrinsic value is enticing only if the company's fundamentals are solid or improving. Without a clear recovery strategy, Wynn Resorts faces the risk of continuing performance declines, potentially turning the low price-to-GF-Value ratio into a value trap rather than an opportunity.
Conclusion: A Closer Look at Wynn Resorts as a Value Trap
When considering Wynn Resorts's stock, the evidence suggests caution. The combination of a low Altman Z-score, declining retained earnings ratio, and negative revenue and earnings trends point towards the stock being a potential value trap. Investors should conduct extensive due diligence and consider these warning signs before committing to Wynn Resorts as an investment.
For those seeking to avoid such traps, GuruFocus Premium members can use the Walter Schloss Screen to find stocks with high Altman Z-Scores. Additionally, the Peter Lynch Growth with Low Valuation Screener is available to identify stocks with robust revenue and earnings growth.
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.