Wynn Resorts Has Expensive Rooms, But Its Stock is Looking Cheap

Posted on: August 13, 2019, 10:59h. 

Last updated on: August 13, 2019, 12:17h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Shares of Wynn Resorts, Ltd. (NASDAQ:WYNN) are lower by 20 percent this month. But one analyst sees the casino operator as significantly undervalued, even as geopolitical headwinds in the Asia-Pacific region weigh on the stock.

Wynn Palace Macau. The market remains critical to the company’s fortunes. (Image: CNBC)

That month-to-date loss of 20 percent is, by definition, a bear market for Wynn stock, and investors have been ditching the shares. That happened even after the company reported better-than-expected Macau results when it delivered second-quarter earnings earlier this month.

Macau accounted for 70 percent of Wynn’s revenue in the April through June quarter, and while there was slippage in the gaming company’s VIP business there, the company made up for softness among high-end gamblers with strength in the mass market.

Macau core mass gaming sales were up over 22% in the quarter, an acceleration from the 13% growth seen last quarter, as the company continued to take share,” said Morningstar analyst Dan Wasiolek in a recent note. “That said, premium mass remained choppy (unquantified), which we think is due to ongoing geopolitical events (Hong Kong protests and China-US trade war) and the current ramp up of MGM’s Cotai property.”

On Monday, flights in and out of Hong Kong International Airport were halted, as long-running protests intensified. The canceled flights prevented passengers from boarding planes destined for, among other destinations, Macau. The protests, which have spanned over two months, stem from an effort by Beijing to extradite criminals from Hong Kong to mainland China, where the criminal justice system is more complex and could result in harsher punishments.

Forecasting Improvement

Competitive pressure from MGM Cotai and geopolitical unrest will not be permanent themes affecting Wynn in Macau, said Wasiolek. The company is making moves to fortify its presence on the peninsula, including plans for the $2 billion Crystal Pavilion, which will add 1,300 guestrooms near Wynn Palace.

“We expect premium mass business to improve next year with the completed hotel and casino renovations at the Wynn Macau property at the end of this year,” said the Morningstar analyst. “Overall, we are encouraged that total two-year stacked mass volume (core and premium play) grew 25% and 71% at Wynn Macau and Wynn Palace, respectively, an acceleration from the respective 16% and 65% lift posted in the prior three months.”

Chinese policymakers are pushing for increased economic diversity on the peninsula and reduced dependence on gaming revenue. Casino companies, including Wynn, are rushing to oblige ahead of the 2022 license renewal process and those moves could result in increased, non-gaming tourism to Macau.

“Additionally, we expect upcoming developments that add attractions and improve Macau’s accessibility will improve the destination’s brand, supporting our constructive long-term view on Macau,” said Wasiolek. “With Wynn holding one of only six gaming licenses, it stands to benefit from this growth.”

Good Deal

At this writing, shares of Wynn trade just over $110, a far cry from the average analyst price target of around $137, and well below Morningstar’s fair value estimate of $164. The research firm does not expect to “materially change” that forecast.

Wynn trades at about 18x forward earnings, a discount to the 25.19x on shares of rival MGM Resorts.