With a collapsing share price, Wynn Resorts (WYNN) stock now yields an all-time high of 4.3%. Down roughly 50% in the past 12 months, the company does come with its share of concerns. With a long track record of success and a more than capable management team, however, this may be an opportunity for the enterprising investor.
The business
Wynn Resorts, Limited, owns 72.2% of Wynn Macau, a casino hotel resort property in China. The company also owns and operates a casino hotel resort property in Las Vegas, Nevada.
Macau: A resort destination casino with two luxury hotel towers with a total of 1,008 rooms and suites, approximately 280,000 square feet of casino space, casual and fine dining in eight restaurants, approximately 57,000 square feet of retail space, and recreation and leisure facilities, including two health clubs and spas and a pool.
Las Vegas: Two luxury hotel towers with a total of 4,748 hotel rooms, suites and villas, approximately 186,000 square feet of casino space, 34 food and beverage outlets featuring signature chefs, an on-site 18-hole golf course, meeting space, a Ferrari and Maserati dealership, approximately 96,000 square feet of retail space, two showrooms, three nightclubs and a beach club.
History
Major impending growth opportunity
The Wynn Palace in Macau is expected to be completed in the first half of 2016 at a total estimated cost of $4.1 billion. This will be a fully integrated resort featuring 1,700 hotel rooms, casino, spa, retail and food and beverage offerings. This would be the company’s largest opening in Macau so far, a region that has grown to comprise ~70% of earnings.
Slowing Macau growth weighing on shares
As you can see in the tables below, growth in the Macau casino market has dropped off dramatically. The region saw total gaming revenues drop 2.6% year over year. During the first two months of 2015, gaming revenue is down a whopping 35% compared to the first two months of 2014 and the data doesn't suggest that anything will be getting better any time soon.
The number of visitors to Macau from mainland China is set to be capped at 21 million per year, according to a proposal in front of government officials. Total Macau visitors were 31 million last year.
Casino operators in the region have said they expect to grow the rate of international tourists with mainland growth possibly stalled at current levels. Sterne Agee isn't in panic mode over the Macau sector, noting the 21 million cap proposal could be posturing by the government in order to pull some levers with companies on land allowances.
Management
The company is led by Stephen Wynn, currently the chairman of the board and CEO. Prior to founding Wynn Resorts, Stephen Wynn was chairman of the board, president and chief executive officer of Mirage Resorts from 1973 to 2000. In that role, he was responsible for the development of Bellagio, The Mirage, Treasure Island at The Mirage and the Golden Nugget in Las Vegas, Nevada, as well as the Atlantic City Golden Nugget in New Jersey and Beau Rivage in Biloxi, Mississippi.
Valuation
While growth estimates are still expected to be pulled back given the uncertainty in Macau, consensus estimates still expect WYNN to grow at roughly half the historical rate for the next five years. This still amounts to >20% annual growth.
We can use GuruFocus’ Reverse DCF tool to estimate the current growth rate priced into the company’s shares. At its depressed share price, investors are only pricing in ~12% annual growth. Should Macau revert to the mean, the shares could be dramatically underpriced.
Dividend
Even with lower EPS estimates, WYNN should be able to cover its current dividend payment which is yielding >4%. Depressed EPS estimates for 2015 are $5.68 per share versus a current dividend of $5.30.
Conclusion
While there is significant uncertainty regarding Macau, WYNN’s management team and founder were some of the original pioneers in the region. WYNN remains the most capable of any casino operator to right the ship and capitalize on any ancillary growth opportunities. Should Macau revert to anywhere near its previous growth rates, the shares look to be severely undervalued.
For more ideas like this one, check out GuruFocus’ High Yield Dividend Stocks List or the rest of R. Vanzo’s Articles.
