WYNN - Wynn Resorts: Too Much Of A Gamble For Me

2023-07-07 14:48:44 ET

Summary

• Wynn Resorts, Limited shares have returned a loss of about 10.4% in the last two months, and the company's financials still pose challenges, with the casino business performing significantly worse than four years ago.
• Despite a better quarter than the same period last year, the company's total revenue in 2023 was 14% lower than in 2019, with net income 88% lower than in 2019.
• Wynn Resorts shares are still overpriced and I will continue to avoid them, but may reconsider if they drop significantly in price.

It's been about two months since I wrote my "avoid" piece on Wynn Resorts, Limited ( WYNN ), giving the article the very original title "Wynn Resorts: Continuing to Avoid ." Since then, the shares have returned a loss of about 10.4%, against a gain of about 7% for the S&P 500 (SP500).

This is gratifying for my very fragile ego, but it's time to review the name yet again. After all, a stock trading at $100.20 is, by definition, a less risky investment than the same stock that's trading at $111.30. Additionally, the company has reported Q1 earnings since, so I thought I'd review those and decide whether or not it makes sense to buy these shares at current levels. I'll make that determination by comparing these financials to the valuation. If the market is now much more pessimistic, I'll likely take a position.

Welcome to the "thesis statement" portion of my article. This is where I give you a bit more than you got from the title and the bullet points, above, but much less than the 1,600 words that my articles typically run. You're welcome.

The business put in a much better quarter than it did this time last year, but I think the business still has challenges, as we're still far below where we were in 2019. The casino business, in particular, is much worse today than it was 4 years ago, and it's obviously a significant contributor to revenue. At the same time, the valuation sits at a premium, though not egregiously so.

I've seen worse overvaluation recently, but I'd still rather just sit on the sidelines here, especially given that I can earn 375 basis points more from a risk free investment than I can from this stock. The dividend may grow from current levels, but current indebtedness puts a brake on that in my view. This isn't the worst risk reward I've ever seen, but in a world of finite capital, there are far better risk-adjusted investments available to people.

Financial Snapshot

The most recent financial result is "good" or "bad" depending upon your frame of reference. If you compare it to the same period last year, the current quarter looks great. Revenue for the quarter rose $470 million, or 49% from the year-ago period. At the same time, net income swung from a loss of $183 million to a small gain of $12.3 million. Sure, debt was higher, but only by $327 million, or 2.75%. I've certainly seen worse on that front recently. In spite of the higher debt load, interest expense was down slightly by $3.3 million, or 2.2%. That's a way to put a positive spin on the most recent first quarter.

If we compare the most recent quarter to the pre-Covid era, though, things look different. Total revenue in 2023 was actually about 14% lower than the same period in 2019, with the casino business putting in the worst performance, down $418 million, or 35%. Given that casino represented 72% of the business back then, and represents about 54% of the business today, this is significant in my view. A drop in the casino business is troublesome for a company like Wynn. Moving on, operating income, and net income are lower by 34% and 88% today than they were in 2019. The fact that net income was $92.5 million lower in 2023 than it was in 2019 should give even the most ardent bull pause.

In my previous missive, I predicted that there's some reason to believe that a small dividend would be started up again, and that happened. It's about a quarter of what it used to be, but it's a start. Given the dividend, and my continued belief that it's reasonably sustainable, I'd be happy to buy the shares at the right price.

The Stock

If you read my stuff regularly, you know what's about to happen. We've come to the portion of the article where I write about how "the stock" and "the business" are different things. The company makes money by offering gaming, food, and entertainment services. The stock is a piece of virtual paper that gets traded around in a market that is often capricious. The stock price moves around at a much faster rate than does the company, and is driven by a host of factors, only some of which relate to the underlying business. The stock may move up and down in the short term based on short term interest rate changes, or the demand for "stocks" as an asset class. Additionally, the stock moves around at a faster clip than does the company itself.

For instance, had some bought this business four days ago, they're down about 7.4% since. If they bought yesterday, they're up about 2.5% since. The business didn't change 10% in that time, and the difference between the winner and the loser in this game is mostly luck. This is why I insist on trying to only ever buy shares when they're cheap. At least when shares are cheap, you're more likely to eschew them just before they plop in price.

Specifically, in my experience, the only way to trade stocks profitably is to spot discrepancies between expectations and reality. If the assumptions embedded in the stock price are too rosy, you avoid or sell. If the assumptions are too dour, you buy. I really hate to remind you about my success here, but this is how I avoided a 10%+ loss in 2 months here..

Another way of writing "too pessimistic" is "cheap." I like to buy stocks when they're cheap, because they have a great chance of beating expectations (there's that word again). I measure the cheapness of a stock in a few ways, ranging from the simple to the more complex. On the simple side, I look at ratios, and I want to see a company trading at a discount to both the overall market and its own history.

When I last reviewed Wynn, I fretted and fussed because the stock was sporting a price to sales ratio of 3.385 times. I moaned about the fact that we hadn't seen valuations that high since 2014, when the company had about 39% less debt on the balance sheet . I didn't write in that article, but I should have, that I'd be happy to buy at a much more typical price to sales ratio of about 2.2 times. Fast forward to the present, and here's the current state of the world.

For your reference, here's the current dividend yield also. Investors in this stock are receiving income that's about 375 basis points lower than the risk-free rate. Stocks have risk in a way that government bonds don't. In my view, you should receive more for taking on risk, not less.

The Relevance of Ratios

You might complain that my process of looking at ratios is "backward looking." I think that complaint misses the point. Although looking at the past is useful in my view, ratios are a much more powerful tool in a specific way. You may recall that earlier I stated that I would be willing to buy this stock if it returned to a more typical price to sales ratio of 2.2. The problem for me is that the price to sales ratio is about 2.675 at the moment, or about 22% too high in my estimation.

Based on the above, I can now quantify what would have to happen to this combination of price and sales to make the deal acceptable to me. I ask the question, 'what will need to happen for the price to sales ratio to hit 2.2 (an attractive price)?" There are two extremes, and some combination of things that will bring the shares back to a reasonable valuation. If we hold the stock price constant, sales will need to grow by about 21%. If we hold sales constant, the stock will need to drop by about 18% from current levels. The most likely outcome is for some combination of increased sales, and lower stock price. This is how we can use backward-looking ratios to attack assumptions about the future. So we now have to ask ourselves, are sales likely to rise by 21% from current levels? It's possible, and I've seen more aggressively priced shares. More likely, I think the price will drop somewhat and sales will rise to normal levels again.

Given the above, and given that I can earn a much greater return in a risk-free instrument, I'm going to continue to eschew Wynn Resorts shares. They're not as egregiously expensive as they once were, but they're still overpriced in my view. If Wynn Resorts shares drop materially in price, I'll reconsider.

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