MGM - Wynn: Sector Feels Uncertain But Buy Signal Loud And Clear For Legacy Leader

2023-07-11 18:32:14 ET

Summary

• Bears think Wynn Resorts, Limited forward prospects are already baked into the trading range. That's wrong.
• Investors need to understand the long history of this stock trading above sector peers because of Steve Wynn and now his property legacy.
• There is a much higher-priced stock hiding at the moment of writing for $105.

“If you’re going to ask people to sit on a plane for hours to get to your joint, you’d better have the goods. And even if your place is next door, it’s still no excuse to have what is basically a slot machine warehouse.”

Steve Wynn, to the author back in the day

It is of continuing puzzlement to me how until now, many analysts and institutional investors still don’t really understand why the shares of Wynn Resorts, Limited ( WYNN ) always trade at a premium to the sector, but still this is what I call a tuning fork stock. That means followers of the shares sit like piano tuners with their wrenches in hand, plucking at the keys, listening and then moving the tool to recapture the pure truth of sound of each specific key. Their skill: listening and twisting their wrenches based on the trained musical ear acuity.

Tracking the trading patterns of Wynn shares as an industry insider and analyst over time, I have seen single blips of news, in one market, cause an immediate hit of 3% or more to the shares sometimes even more.

What I conclude is that too many investors still see this stock as a piano, being tuned, occasionally hitting an off note, other times singing beautiful tunes and not acting on what the stock really is: a solid, long-term, resilient investment in a proven consumer discretionary sector.

Note: When this article was finished but as yet unpublished, Wynn was trading at $105.

Wynn fits the Buffett mantra perfectly: in theory, the sage of Omaha has said, if you can’t see owning a stock for ten years, you shouldn’t own it for ten minutes.

Why Wynn is different and deserves at least “black chip” status for its long-term trading pattern above sector peers

First, as a competitor and later as an analyst, I have been following the behavior patterns of Wynn stock including its earlier incarnations as Golden Nugget, and later, Mirage Corporation, since 1980. From that early date through to 2018 when founder/CEO Steve Wynn resigned over allegations of sexual misconduct with female employees in a Wall Street Journal article, I saw the company as something of a unicorn.

That is, it was what it became, largely because of the singular insights of Wynn himself.

This is not pom pom-twirling for a long-forgotten past. The company for decades has had many good managers who had bought into the Wynn mantra and contributed mightily to its premium EBITDA performance. But Wynn was an exacting, and at times volcanic, boss, never a man easy to work for during good times or bad. Of those who left him and came to work for me, no one never denied his singular genius of building greater properties than anyone else in the business. He created the blueprint of gaming's future.

Many newbies who’d arrived at Wynn thrived over time, learned the business, and left millionaires as a result of his always generous distribution of stock options.

And therein lies the key. Stock options are only as good as the potential of the company to trade significantly above the strike price when they mature. A good deal of the options issued by many companies during that era were little more than toilet paper because those shares tended to slosh around at lows forever. Wynn options remained gold-plated because there was an unspoken certainty that the stock would always move well above exercise prices.

The Wynn formula was simple, but real tough to duplicate. Briefly it was not only build a better mousetrap, but build the best mousetrap money could buy. He once told me, “What a lot of guys in this business don’t seem to really grasp is that the best and most productive marketing program is in the walls.”

This approach often triggered negative outlooks from analysts who at times accused him of overspending on amenities that meant little in terms of transforming them to accretive EBITDA. And there was a passage of time when that appeared to hold true. It was around 2000 when super smart investor Kirk Kerkorian of MGM Resorts ( MGM ) joined the party of naysayers, reinforcing the skepticism when Wynn had acquired hundreds of millions of dollars in impressionist art to decorate a museum gallery at the Mirage. Earnings lagged temporarily, the stock tanked to all-time lows.

Kerkorian told me, “When you can buy Steve Wynn properties at these prices, you don’t hesitate.” He paid $21 a share for then-named Mirage Corporation, double the price before he made his final, successful offer.

But Wynn was not to be deterred. After he sold to Kerkorian’s MGM, he started again. (Don’t even begin to calculate how much Wynn’s collections have appreciated over time. Our best sources say somewhere above $1b, probably tripling over the decades).

The second tent pole of Wynn shares that remains sunk in the ground even today is the meeting of top-down and ground-up management policies and execution of programs that blend to produce a powerful tide of player loyalty over time. It’s not as simple as friendly dealers, smiling faces at the buffet, unique entertainment offerings, and dining outlets that can compete with the best of those in the great food cities of the world.

And finally is the wow factor. That is all the free, un-marketed business that merely walks into Wynn properties as a “must see” attraction. As a Caesars executive, I was accustomed to the value of rail gawkers at the baccarat pits where our million-plus Asian customers played. On many occasions I had our research teams follow the three-deep gawkers who stood stunned watching Asian billionaires play $200,000 a hand like they were eating peanuts.

Gawkers found their way to our coffee shops, our buffet, our quarter slots, shows, bar lounge, gift shop of logoed merchandise. And the draw was simply the urge to be “there.” This phenomenon was multiplied many times at Wynn properties—even when there were no Asian billionaires tossing $100,000 plaques into the game.

Tourists and day trippers came to Wynn to drink in the singular chemistry of luxury of places and people. Their average guest had paid more for rooms, more for food, and tended to look more affluent than guests at competitive properties. So Wynn’s third mantra was exactly another old-time truth: birds of a feather do flock together, and nowhere is it more true than the casino business. Wynn properties always had the best looking crowds of people hungry for a little bit of status.

So, the result of all this was that over time, the win per square foot of Wynn table games, and slot machines outperformed the entire industry. With often much smaller casino space, Wynn properties were banging out more bucks, showing superior margins that translated to outstanding earnings. And in the end, that was why most analysts from way back in the day, to even now, ascribe a premium to the trading range of the stock. But now, in this age of super technology and zero attention spans of large segments of the investment community, much of this legacy conviction has gone unrecognized. As such, we have the tuning fork applied to Wynn shares which is anything but the same method to value its shares as many peers.

What’s changed

Today’s stock market operates on a near zero attention span, led by institutional trading volume triggered by algorithms that amount to piano tuning as noted above. Yet even in this kind of complexity and hair trigger trading devices, the record over time is where the decision making must lie. Within the past few weeks, Macau monthly GGR reported a slight decline from the strong monthly sequential gains since January 6 ^th when China lifted its covid zero bans. Some analysts saw this as an omen of a slowdown when in fact, the historical revenue trends by quarter in Macau always have showed a seasonal slowdown in the month of June.

For the record:

At the birth of its Macau life in 2014, Wynn traded at $245.27 a share. It was the highest price entry at the time.

Wynn shares hit a 5 year high on January 9,2020, just before the cusp of the covid disaster. That day the stock traded at $142.15 and was probably on its way higher.

In the throes of covid, by May 2020, the shares had tanked to $77.52, still lingering above many peers at the worst of times.

This was a pattern that traced all the way back to the Golden Nugget era under Wynn management when its Atlantic City ("AC") entry in 1980 sent the stock soaring with the sector, but always trading at a premium. The reason: if you visited AC back then you’d see most properties were renovated old dowagers, or newly built nice, but nothing unusual places. The Nugget was in its way, the sparkling jewel of the town. Built from the ground up, at an isolated location, glittering in detailed architectural amenities. It stood like a time warp to 1950's Las Vegas and customers with fatter gaming budgets flocked there. Their casino was among the smallest in town. But in high limit table games and then much hungered for dollar slots it outperformed.

In other words, Wynn properties have always been built to punch above their weight and expand exponentially in attracting premium play. Back then, we at Caesars owned the Asian baccarat business---largely due to the aura of the Vegas Caesars Palace property throwing a halo across our AC place. But over time, Wynn did find a pathway to that business as well built off its successes in Las Vegas after abandoning AC.

The $439m price Bally had paid for the Golden Nugget bore a fat premium. Market observers believed Bally overpaid as a defense against a Donald Trump greenmail move. Analysts at the time called me and said regardless of defensive moves, Bally had overpaid. In reality, they got a bargain.

The key here was that Wynn took the money and ran back to Vegas where in 1990, up rose the Mirage, redefining the landscape of that market and setting a standard not only there but for what was to come in Macau. Today’s markets are sometimes short on memory. In January of 2018, beset by backlash from the above noted allegations, Wynn shares spiked up to $173. What Mr. Market was saying that the legal implications of his continuing were devastating. And that the company was better served without the threats of massive lawsuits and potentially embarrassing disclosures that would continue if Wynn opted to fight through the courts and regulatory mess ahead. That was true—but the reason the shares spiked north at his departure was that the correct belief at the time was that the enduring strength of Wynn properties over time would carry the stock higher despite his legal woes.

Above: Wynn's Middle East market expansion in the UAE is way off but its island concept will wear well in the EU and key Middle East wealth centers.

Coming out of covid early stage

Wynn’s 1Q23 performance shows the early positive post-covid results one expects to continue to even better results ahead.

Bear in mind that over 70% of group revenue comes from Macau. But 1Q23 results also show exponential gains that began in Las Vegas last year when pent-up demand from covid was released to bring that market to new highs.

1Q23 hit revenue of $1.42b up $470m y/y. Net income was $123m, bringing the diluted loss per share to ($0.02) vs a loss of ($1.59) for 2020. Adjusted property EBITDAR was $429.7m vs $1.76m for 2022. Wynn has declared a $0.25 dividend.

Our point here is this: Clearly the entire casino sector has advanced dramatically out of the covid disaster propelled both by pent-up demand and expanded facilities. Another factor is that many cost cuts taken under covid pressure months have remained improving ongoing margins. Wynn debt sits at $12.25b, but refis this year have extended maturities to 2031.

Forward look

Above: Note the historic decline in Q2 revenue related to the arrival patterns mostly in Macau over a decade, but also to an extent, Vegas visitation.

We look at forward prospects for Wynn shares from a long-term perspective, bearing in mind its historical ability to overperform peers due to a generally higher average customer spend. Many observers believe that the sector in general is due for a slowdown. Pent-up demand may be spent, the China economy is floundering, recession fears still loom over the U.S. But there has been a long history of bearish intrusions that Wynn has overcome—even after the departure of Wynn himself. His legacy is in the walls of Wynn properties and that will stand investors in good stead no matter the uncertainties ahead. That’s what guides our forecasts:

2023 revenues: $6.4bE

2024 revenues: $7.7bE

2023 earnings: $2.76E

2024 earnings: $3.65E

1 year price target: $135-$143

Price at writing: $105.

Conclusion

Our contention is to take in stride the somewhat bearish outlooks that assume pend up demand is spent, that the China economy tanking will bruise Macau badly and that there will be many dips ahead. That is a factor, yet I believe that Wynn shares will continue to be traded at a premium due to its excellent product mix, average customer value, and long-term appeal to a more affluent player and tourist base.

In the case of Wynn, history does tend to repeat itself in terms of what has propelled the stock in the past and still works in its favor in the forward quarters. At its current "premium" price against peers, Wynn Resorts, Limited stock is still a BUY.

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