"Skepticism has never founded empires, established principles or changed the world's heart. The great doers in history have always been people of faith…"
Edwin H. Chapin
Whether one's faith is vested in a religious institution, a government, a mentor, an economy, an industry or a given stock, sooner or later, one truth emerges: That faith will be tested. And that's the case throughout for the true believers in the long-term upside of the shares of Wynn Resorts (NASDAQ: WYNN). Just like the company has its strong cadre of convinced adherents (including the writer) it likewise has its heretics, aka, shorts. These are investors who continue to interpret every shred of news out of Macau as negative for the shares, and swat away like so many annoying flies, remaining unconvinced, stubbornly clinging to their little metrics and burrowing for any little worm they can uproot to bolster their bear case and protect their short positions.
Fair is fair. The past year and a half has been a financial minefield for Wynn and its peer Macau competitors. There's been no shortage of scary headlines since the original junket crackdown in February 2015 brought down the hammer on the VIP business. That explosion sunk GGR that month to more than 48%. However, there is a difference between straight news and the obituary column. And since then, Wynn bears in particular have continued to write death notices for the stock and the industry and are still doing so.
Is Wynn out of the woods back on the golden road to record EBITDA numbers? It is not. That's a destination the company will surely reach, but for the moment, let's say it's deftly maneuvered past the minefield and headed for daylight. Bullish believers have already been rewarded and will continue to be so as the next Wynn projects transmogrify from the debt line of the balance sheet to EBITDA.
Shorts could be headed for the barbershop unless they're inclined to trade options against what is clearly a generally antsy push pull market. We have no problem with that strategy.
Our problem is with the short money that has attempted to create an image of Macau in general and Wynn in particular, as denizens of a Lost City of Atlantis, awaiting some cataclysmic event that will explode and sink it into the Pacific Ocean.
We demur. Quoting the ever rapier witted Mark Twain on behalf of Wynn shares we simply state, "reports of my death have been greatly exaggerated…"
A growing bullish consensus on Wynn and Macau is increasing
Just for context, a year ago, Wynn hit a 52-week low of $97.89 and subsequently plunged horribly over the ensuing months to a low of $49.95 when all the death notices began springing up. Wynn was a falling knife, its leverage irresponsibly high, its VIP market evaporating faster than a speeding bullet and Steve Wynn wasn't Superman, moving fast enough to stop it.
We demurred. We certainly recognized the real bear case but continued holding to our belief, based on our own 360-degree view of the company and Macau in general, that holders should hold, and others should see a great entry point. We repeated our mantra, probably too often; so with apologies we now repeat, never bet against Steve Wynn.
As of this writing, Wynn sits at $97, just about where it was a year ago buried in the incessant rubble of bad news out of Macau and dramatically up from its lows. Now, having shaken off the fusillades of artillery and remaining firm toward an upside, we've guided Wynn to $135 by the end of Q3. There will be wiggles and shakes points up and down, but overall, we like the prospect of a break through holding firm above $100 sooner rather than later.
For the moment, based on our sources and evaluations of Wynn and the market, we believe that the shares will crack the $100 resistance range shortly and will be headed north from there. Given the interim tremors that the shares can experience, we're not suggesting an uninterrupted straight line, but a somewhat ragged one, which nonetheless, will continue its basic upside momentum.
1. Our weekly call arounds to our Macau associates and industry friends are thus far confirming their take that May GGR could show around a 4% to 5% increase over April, ringing the cash register for around $2.27 billion. If this number does come in, it will represent a 10% decline yoy from 2015. This is against a 34.3% decline yoy 2015 from 2014. While any minus number is no cause for celebration, the fact remains that the yoy decline for May could have narrowed by 23%, a big number. Bear in mind factors such as gyrations in hold percentages and other related contingencies could change that number but we think the word "stabilizing" is appropriate here and that's news the short money doesn't like to hear.
2. Going forward consensus currently ranges from a final 1% increase in yoy GGR by year's end on the plus side to others we've talked to who believe 2016 GGR will come in around 9% or 10% down, a considerable improvement over the disastrous 2015.
3. Our associates are in fair unison in believing that GGR will grow by between 7% and 10% over the next five years, taking into consideration the debut of more room inventory, the probable completion of the bridge project spurring Hong Kong visitation. etc. (Other infrastructure improvement such as the light rail are bogged down in bureaucracy and can't realistically be seen as contributors until the operators get a better handle on when they'll materialize).
At the Global Gaming Expo (G2E) last week, Aaron Fisher, CFA, who heads Pacific and Gaming analysis for CLSA told his audience,
"Macau is still in pretty good shape with gaming companies generating above average returns and little risk to bankruptcy. The Macau government is sitting on a surplus, there's virtually full employment, GDP per capita is among the highest in the world."
Echoing this generally bullish view was Fitch, which in a report expressed their view that:
1. There is a slowly improving picture in VIP. Wynn, because of the opening of Wynn Palace and its ability to transfer 50 tables and labor costs of $100 million from its current property, will get a disproportionately large percentage of any improvement in VIP and Premium Mass revenue going forward.
2. The Fitch estimate is that Wynn Palace will produce $580 million in EBITDA against an earlier company estimate of $650-$850 million. We did our own math after conversations with our sources there and came up with an estimated range of $625 to $700 million EBITDA for the property. Fitch also reported it rated Wynn debt as "stable."
Telsey Advisory Group further supported the view of my sources who believe that the mass sector was clearly improving and VIP stabilizing.
3. On the ground view of the macro VIP debt picture is that bad debt issues are easing and collections improving. Lots of room for improvement without question. However, in the words of one associate who lives that life every day, "We're well into clean up mode. I see the numbers every month. We're heading in the right direction." Improving what exists is naturally a plus, slow and steady as she goes. Yet, what too many investors don't fully realize is that the percentage of potential bad debt added is shrinking rapidly. "Shaky junket operators have closed down left and right. We're down to less than half of what we had at the peak in 2013. Solid performers can weather the storm and will. Credit decisions are now tighter, smarter," said the source. (Junket operators hit a peak of 231 in 2013 and now number 142, including one new entry).
4. Estimates of Wynn share of table games going forward: Assuming a Q3 opening of Wynn Palace, our sources believe that total Wynn share of the table games market after it opens will increase from 10% to 14% by 2018. "Some of this will come from other properties, some from entirely new customers, still more premium mass will come from "the place to be" customer sector," said our source.
Las Vegas and the new projects
Wynn numbers in Las Vegas are holding firm, fairly consistent with the market in general. Non-gaming is up, gaming stable to ticking slightly down according to hold percentages.
The news in Las Vegas for Wynn is characteristically not sitting fat dumb and happy. We've already written about the company's outdoor attraction resort project, Paradise Park, which we believe will be strongly accretive to Las Vegas EBITDA for Wynn.
The only major addition to capacity in the town will be the Genting
Asia themed project on the old Echelon site, which will bring 5,000 more rooms to the strip. The company just received all the official nods last week to get moving. Whether we'll continue to see a few earthmovers shoving around the site or real action with large construction crews remains to be seen. But the bottom line is that there is no question if that property does get built, given its parent's global reach into the Asian player base, it could dilute some of that business from the town's high-end properties - including Wynn.
And that's one reason, among many naturally, that we have a Paradise Park project to counter balance any possible revenue loss and in fact, increase the company's total EBITDA take in Vegas.
Wynn's Everett project is going full steam ahead on its environmental cleanup of the site. The lawsuits are hanging around but few locals we spoke to believe they'll go anywhere near stopping the project. In addition, last week, state gaming regulators gave a thumbs down on a proposed casino in the Brockton, Massachusetts area, which, while no great threat to either the Wynn or MGM projects, was another little fly in a witch's brew which has been boiling in that state for two years. Now a proposed tribal property in Taunton is still alive, as is yet another fighting brand across the border planned by the two Connecticut tribal operators. These two probably pose more of a threat to the Penn National's (NASDAQ:PENN) Plainridge Park slot parlor already open, than it will to the Wynn project coming in 2018.
Is Wynn's march to my guidance of $135 bulletproof? We can only respond, what stock is? Will the market tank this year? Will the Chinese economy swoon? Have both bullish and bearish outlooks on Wynn been wrong before? Naturally they have.
What you do is weigh the good news/bad news feed, watch the scales and develop a sentiment based on what you see, feel and know about the company's performance over time.
We like the balance we see coming in Wynn and therein lies the sentiment we have that the shares, even at its current trade, has a nice upside left before the end of this year.
About the author: Howard Jay Klein is a 25+year veteran casino executive and consultant. He is the author of Mastering the Art of Casino Management. His own gaming portfolio is held in a blind trust for his family to avoid potential conflicts of interest with his casino clients.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.