Wynn Resorts (WYNN)

 

August 23, 2013

COMPANY DESCRIPTION

Wynn Resorts (WYNN) designs, finances and builds gaming sites in Las Vegas and Macau. The company reports table games figures for two segments: the VIP segment and mass market. The company’s first resort, Wynn Las Vegas, opened in April 2005 and cost $2.7 billion. In China, the company has signed a 20-year concession agreement with the government to operate Wynn Macau. The Wynn Macau opened in September 2006 and consists of 600 hotel rooms and 100,000 square feet of gaming space. We estimate that the Wynn Macau, including additional casino space, cost $1.1 billion.

INVESTMENT THESIS

We believe the investment community has failed to fully appreciate the company’s emphasis on the VIP segment, as well as its strong presence in the mass premium (affluent clients) and mass markets. We see significant value in the company’s Cotai (land annexed by the Chinese government) development. We also expect WYNN to benefit from high-end customers in Las Vegas.  Overall, we look for Wynn Resorts to gain from recovery in the Macau VIP market, solid free cash flow and growth in Cotai.

RECENT DEVELOPMENTS

Second-quarter 2013 net revenue totaled $1.3 billion, up more than 6% from the prior year period. Revenue missed the consensus estimate by $10 million. Excluding special items, WYNN reported earnings per share (EPS) of $1.51, below the consensus estimate of $1.57. During the second quarter, total property level earnings before interest, taxes, depreciation and amortization (EBITDA) rose 11%, to $426 million, driven by much better Las Vegas results. Reflecting much higher corporate expense, the EBITDA margin decreased 70 basis points to 28.1%. Interest expense held steady at approximately $74 million. Diluted shares outstanding increased by 500,000 to 101.5 million.

EARNINGS GROWTH & ANALYSIS

In 2013, we look for revenue to increase from approximately $5.2 billion last year to more than $5.4 billion, a 5% increase. We project 8% higher revenue in Las Vegas, with Macau increasing less rapidly as the VIP segment there continues to recover. In 2014, we expect revenue growth to decelerate and project revenue of $5.6 billion. We expect the property level EBITDA estimate to increase from 28% in 2012, to 29% in 2013. The higher margin reflects strength in Las Vegas, offset in part by some softness in the Macau VIP market. On the bottom line, we expect EPS to increase 29%, to $6.70 per share. For 2014, we are establishing a preliminary earnings estimate of $7.80 per share.

RISKS

Risks to our estimates and price target include unfavorable Macau or Chinese government policymaking or restrictions. In addition, WYNN competes against the much larger Las Vegas Sands in both Macau and Las Vegas. Such competition could lead to lower margins and loss of market share. Delayed construction of the company’s Cotai project is also a risk. Finding a replacement for Steve Wynn could also be difficult. Weaker than expected recovery in Las Vegas and accompanying weak gaming spend could hurt earnings.

VALUATION

In our opinion, at its current price, the shares appear undervalued. The stock is trading at 17.8 times our FY14 earnings estimate, a relatively low multiple in view of the 25% EPS growth we project. Based on prospects for a recovery in the Macau VIP market, strong growth in Cotai, the company’s emphasis on the VIP segment, we believe a higher multiple is warranted. Multiplying our FY14 earnings estimate by 20.5 generates a valuation of $160. Multiplying our 2014 EBITDA estimate by 12 (the gaming company average), generates a valuation of $162. However, we believe investors will use forward P/E multiples when valuing the shares.  Our target price, if achieved, offers investors the prospect of a 17% total return (includes the 2.9% dividend).

Wynn Resorts (WYNN)
Current Price: $141.26
Target Price: $162
Current Valuation: 17.8 times 2014 EPS
Target Valuation: 20.5 times 2014 EPS

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