Monday, June 1, 2009

Fortune: Wynn Resorts (WYNN) Bull or Bear?

Fortune occasionally will run bull v bear arguments on specific stocks of interest - in mid April we pointed out one for Harley Davidson (HOG) [Apr 18: Fortune - Harley Davidson: Bull or Bear?] and I just happened upon this one for a name we speak about often: Wynn Resorts (WYNN). Keep in mind being bearish on anything is anathema so I suppose this is only a hypothetical exercise.

It is hard to believe if you've only followed these stocks for a year or less but there was once a time (not 2 years ago) these casino stocks traded like internet stocks of the late 90s. Why? The unending power of the US consumer... and even more important - 1 word: China. (in this case Macau) That should sound familiar in our current environment when this magical country of 1.3 billion people where only a sliver have the means to travel abroad and gamble - but all the world's economy shall be jump started by these folk. Almost every thesis in 2007 started with "yeh but you have 1.3 billion people who can (fill in the blank)". Recall the stock market jockeys love simple, dramatic themes. We see this now just as we did in 2007. Rigor? That's for bond nerds.

Specific to the 3 major public Las Vegas casino groups, we were negative on the group back "then"[Oct 3, 2007: A Top in Casino Names? Wynn and Las Vegas Sands][Nov 1, 2007: China Can't Save Las Vegas Sands - It's Getting Crox'd] ... 2 of the 3 have extreme levels of debt which put them in danger of bankruptcy. But as the banks have changed terms of covenants [Apr 22, 2009: Wynn Resorts, Las Vegas Sands Amend Credit Facilities] it appears Las Vegas Sands (LVS) and MGM Mirage (MGM) will live; although still suffocating under an avalanche of debt. On the other hand Wynn Resorts (WYNN) has had a manageable debt load and probably the best operator running a casino in Steve Wynn. [Apr 12, 2009: 60 Minutes - The King of Las Vegas; Steve Wynn]

That said, as I am doing a lot of reading on what is happening in Las Vegas, because just as in 2007 I think it's a great tell (canary in coal mine) for the US consumer - I am seeing occupency rates fly up as hotels slash rates to unseemly levels. [Dec 23, 2008: Wynn Encore Casino Struggling to Fill Rooms During Launch] So traffic is coming, but they are not spending like in the old days and the bargains they are receiving mark a level of budget minded awareness you don't associate with Vegas. Not to mention the CityCenter opening (a massive project) is going to put another massive wave of supply of hotel rooms into the market. So with these lower rates and strained consumer, should we be paying up? Even for the best operator? Wynn Resorts is projected to lose money this year and then "normalize" to $0.50 in 2010. So even if I discount not 6 months out but 18, I am paying 80x forward estimates... seems reasonable. Errr...

And this folks is what I am seeing in sector after sector where people are bidding up assets regardless of valuation. I know the argument - 2009 estimates are useless, and 2010 are understated.... the magic that is to come in the next 18 months as our old friend, the US consumer comes roaring back, plus our new friend - the Chinese consumer - joins the party will make all these numbers look useless. Sounds like a fairy tale to me but people are pushing each other out of the way to come feed at the trough of Kool Aid. For Wynn Resorts, please note the 50 cents is DOWN from 82 cents which was the consensus just 90 days ago... but the stock has doubled in that time. Let's say analysts are dead wrong... not for 2009 but 2010. Wynn comes in at DOUBLE the estimate, or $1.00. I am still paying 40x estimates 1.5 years OUT. Even at $2.00 in 2010, paying 20x estimates 1.5 years out for a sub 20% growth rate seems hefty.

So on valuation alone I'd like to rethink a short here, but on days like today I'd of been handed a 9% slap to the face. Which is why having short positions right now is a losing proposition - analytical work is useless. Just buy stock... they are good for you. At any price! :)

But let's turn to Fortune to see both the bull and bear case
  • Wynn Resorts is suffering as fewer gamblers visit its hotel casinos, and those who do visit bet less. In the first quarter Wynn (WYNN) lost $34 million, while the Las Vegas Strip recorded its 15th straight month of revenue declines, the worst on record.
  • But the stock has more than doubled from its 52-week low as the Macau market improves and the company reduces debt. Will the shares continue to rise?
Bull Case
  • We upgraded Wynn to a buy in April for two reasons: an improving balance sheet and gains in the Macau market. Wynn has no debt due in 2009 and relatively little due in 2010. When you can buy a strong operator like Wynn without balance sheet issues -- that's a good entry point.
  • In Macau, March gaming figures showed improvement, and several other casino projects under construction have been halted. So Wynn's Encore Macau, set to open in May 2010, is now one of only two new projects opening in the next two years. And it is a fully funded project, so it is not incurring delays.
  • At one point, Macau's gaming capacity was on track to increase 42% a year in 2009 and 2010. Now there will be only single-digit growth. (the 42% was back in the days of Kool Aid) Wynn is well positioned to capture any market growth that results from those next projects. Wynn has already done well in a competitive Macau market. That includes growing their market share over the last 12 months when more capacity was coming online.
  • Our upgrade was not based on assumptions that Vegas was improving. We believe Las Vegas will be down significantly, and we have those declines factored that in. But Wynn is well positioned for when that market starts to turn. We have a $50 price target for the stock.
Bear Case
  • To bet on this stock, you need to believe that visitation will be up significantly next year. That's the primary headwind Wynn faces in Las Vegas and Macau, its only markets. Visitation is down in 2009, and there's nothing to suggest that it will increase in 2010.
  • In Las Vegas, along with the slump in demand, Wynn has to contend with the CityCenter project, which will increase the supply of high-end hotel rooms by 28% when it opens later this year.
  • There's a difference of opinion on Wall Street about whether or not Wynn is going to be able to hang on to their high-end business in the face of additional supply entering the Vegas market. The answer probably lies somewhere between a categorical `yes' and a categorical `no'. But given that limited visibility, Wynn's valuation --17- or 18-times EBITDA, by our estimates -- is too much of a premium to pay.
  • In Macau, where Wynn earns the majority of its profits, 2008 was a fabulous year. But it's gone. And Macau's table volumes were driven higher last year by one junket consolidator that provided tremendous credit for VIP players. That consolidator is pulling back this year.
  • Certainly Wynn has executed extremely well since 2002. Its developments have opened and performed well, and it has proven itself to be among the best operators in the industry. But Wynn's markets are under pressure, and we don't think things will improve next year.
  • A game-changer for Wynn would be if business conventions to Las Vegas are back up sharply next year. But I don't know that anybody has that thesis or that notion at this point.
  • We think the stock can fall to $27.
[Feb 25, 2009: Wynn Resorts Misses by a Country Mile]
[Feb 13, 2009: Leaving Las Vegas.... Literally]
[Feb 5, 2009: Jaw Dropping Action in Casinos]
[Jul 11, 2008: Gaming Stocks Absolutely Destroyed Yesterday]

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