Wynn Resorts: Overpriced, Even After Sell Off

Wednesday's reaction by Wynn Resorts (WYNN) is exactly the type of thing that causes those of us who still deal in the dark magic of "fundamentals" to go batty. I had been shorting Wynn (which let me reiterate is a very well run company) as it seemed to levitate day after day on "hope" and "green shoots." Or our favorite: "the US consumer is back - even if she does not have job."

Valuation was obnoxious, but still it went up, despite being tied very directly to a still very damaged US consumer. But you can't talk sense to a room of stampeding bulls, or their computers, so we averaged "up" and eventually when the stock came back to Earth a bit took a loss on our short.

During that period of ascent the news was light, and glee was in the air. Government spending will save us all; the American conspicuous consumption culture shall return ... yee haw. (See Wednesday's consumer confidence report for a reality check. The disassociation between Wall Street and Main Street continues.)

Wednesday, unfortunately for WYNN, the company had to report actual facts and our dreams of the government ATM replacing the house ATM took a hit. The stock has been hammered. But this is the difficult think about investing: You can be very correct, ultimately, but if your timing is not correct it doesn't matter if you are eventually proven right. You will have suffered serious losses and if you practice any sort of risk management you will have cut your losses.

Even after Wednesday's sell off the stock is expensive -- it's over 60x 2010 estimates. Not 2009; I said 2010. It was even higher a month ago. Even assuming analysts are clueless (always a good assumption) and are wrong by a factor of 50%, the forward PE is 45. Assume analysts are wrong by 100%, the forward PE is 30. But as we have seen, no one seems to care about valuation; as long as a momo stock is going in the right direction, keep buying it. But when reality strikes, just know there are thousands of lemmings trying to exit through the same small door.

Now we will see if that gap I was originally targeting in the $47 area will fill. With the type of traders necessary to create a mirage long gone (the "momo" buys) I think the chances are quite good this will happen in due time.

Specific to Wynn, the company has been incredibly promotional. About a month ago I saw an ad offering a flight from Pasadena to Las Vegas... with hotel included... on a private jet, for $800. Not exactly a profit center.

A snapshot of earnings, via AP

• The casino industry continues to struggle in the third quarter, with gamblers still clamping down on their spending. Such ongoing belt-tightening, coupled with increased expenses, pushed Wynn Resorts Ltd.'s profit down for the second consecutive quarter Tuesday.
• While the casino operator experienced improvements in room, food and beverage and entertainment and retail revenue during the quarter, casino revenue declined. Gamblers have continued to spend less on table games and slots during the economic downturn as they keep a closer eye on their spending.
• Costs have also crept up for Wynn, which is based in Las Vegas. The casino operator was more promotional during the quarter and saw its operating costs and expenses rise.
• The company run by billionaire and major stockholder Steve Wynn said net income fell 33% to $34.2 million, or 28 cents per share, for the period ended Sept. 30. That's down from $51.2 million, or 49 cents per share, a year ago. Excluding property charges and other items, profit was 33 cents per share.
• The company's quarterly results handily beat the predictions of analysts surveyed by Thomson Reuters, who forecast a profit of 15 cents per share on revenue of $743.1 million. Analysts' estimates generally exclude one-time items.
• ... said third-quarter revenue edged up 1% to $773.1 million from $769.2 million.

So what would you pay for 1% revenue growth with the additional bonus that green shoots shall spread across the American countryside in the quarters to come? Apparently 70-80x earnings... before Wednesday.

Even China did not come through... can "Cash for Macau" be far behind?

What?

Oh.. wrong country.

• Macau, which has typically been a bright spot for casino operators with properties on the Chinese enclave, was somewhat of a disappointment for Wynn in the third quarter. Macau revenue declined to $448.5 million from $474.8 million for the casino operator.

Again, a change in character. Last quarter, even if a company missed but the company CEO waved his hands in a magical way and talked about "some sort of stabilization," stocks were running. Now companies are beating and still selling off. Expectations seem to have gotten far ahead of reality.

• "The numbers clearly beat our expectations," said Susquehanna Financial analyst Robert LaFleur. "The results were fairly respectable given the difficult operating environment, but some investors may have expected more."
• KeyBanc analyst Dennis Forst said the profit was inflated by above-average luck for Wynn at its Las Vegas gaming tables and a tax benefit of $10 million.

Love those tax benefits -- seems so many companies have these in the back pocket, ready to bring out when an estimate needs to be beaten.

Disclosure: No position

Comments

[John Galt:]

These casinos are drowning in debt. They will either go bankrupt or will survive only to pay off their creditors for years.

The thing the analysts need to understand is that those were the boom times, now comes the bust times. The high tide years were a tremendous bubble. The idea that we had a couple down years, and everything will just go back to normal is a joke.

Is Center city finished yet? Is Vegas still adding rooms despite the weak demand? Are they going to cannibalize themselves into oblivion? Is the country's community organizer in chief still against conferences in Vegas for private employees?

Oct 29 09:05 AM

[User 406719:]

Bernie,
I go to Vegas twice a year & have for the past 30 years. I have stayed at Wynn and I can honestly say that it is the best run casino in Vegas. That being said when I was there in September it was definetly slower than I have seen it since 911. There is no doubt in my mind that the casino industry is in deep trouble & even Wynn will suffer for years to come.

Oct 30 12:53 AM

[TraderMark:]

Thanks for the anecdotal experience. Steve Wynn is very good at what he does. At least LVS and WYNN have Macau and LVS Singapore. The other guys are more or less US based.


On Oct 30 12:53 AM User 406719 wrote:

> Bernie,
> I go to Vegas twice a year & have for the past 30 years. I have
> stayed at Wynn and I can honestly say that it is the best run casino
> in Vegas. That being said when I was there in September it was definetly
> slower than I have seen it since 911. There is no doubt in my mind
> that the casino industry is in deep trouble & even Wynn will
> suffer for years to come.

Oct 30 04:35 PM

[User 475615:]

This is a fairly well run company. There is as much chance that this is a $60.00 stock as winning mega millions. Steve Wynn knows this and sold a large block of stock in the mid-fifty's. Someday real value for stockholders will be in vogue, I'm shorting at $60.00 and north and may go to Vegas with my profits if they give me a true bargain.

Nov 07 11:57 AM