"Turn out the lights, the party's over,
They say all good things must end
Call it tonight
The party's over
And tomorrow starts
The same old thing again
Okay Wynn (NASDAQ:WYNN) shorts, time's up. Blow your last noisemaker, take off your party hat, mom's outside in the idling SUV waiting to take you home. The Brexit party for shorts is over. If you've taken the money off the table, nice going - book your profits and smile.
Precisely when nobody knows. But history tells us the Brexit swoon's demise will be sooner rather than later. And it won't be a dead cat bounce either. The globe is wallowing in negatives and political turmoil at the moment for certain. But what endures as always is the recognition by investors when they see a ripe bargain, a big fat piñata ready to be struck to pour out the goodies.
That's the case we think that Wynn Resorts has going for it now that the Brexit swoon has taken its initial toll.
As of this writing the stock is down 14% off recent highs. There could be more downside but in our view not a lot. And nothing in the Brexit mess has changed the fundamental bull case.
Therein lies an entry point we think is too good to pass up as it now sits at $87.
In reviewing all the possible implications of the Brexit vote for Wynn we've come up with a series of questions:
1. Will the collateral damage on the markets dramatically impact Wynn's revenue base either in Macau or Las Vegas? Answer: No.
According to our Macau sources the only caution light blinking for gaming operators could be a currency blip due to the linkage of the RMB to the Hong Kong dollar to the US dollar. If the dollar keeps moving higher, according to JPMorgan at least, currency related Macau GGR numbers could be impacted less than 1% - potentially.
However that could be compensated by a total revenue bump if, we repeat, if the narrowing of YOY GGR continues.
2.Will the UK exit hit Chinese entrepreneurs who comprise the highest single segment of premium mass and VIP revenue bases? The answer is no. If anything, the new normal triggered by the UK's exit will cause a devaluation that will make Chinese goods cheaper and in turn actually contribute to a better texture for exporters there. Among them, lots of Macau customers. So while it's unrealistic to assume any bonanza, it is also realistic to assume that the market will continue to stabilize. The VIP business expected to cluster at Cotai won't suffer due to the UK vote. This will translate into an environment that could contribute to a strong Wynn Palace opening performance by the end of Q3, which it is clear, will be a new engine for corporate EBITDA contributions.
There has been much conjecture, mostly coming from short money players, that the delays in the new property opening dates reflects a deliberate policy by Wynn to postpone due to a sagging market. If that is a factor, we've dug pretty deep into our network and have not been unable to confirm that rationale. Steve Wynn has long been a believer in transparency and never one to hide from real negatives impacting his business during the 30 years we've known and observed him as an industry member. It may not be politic for him to keep anything but a happy face now but neither is he a guy given to self-delusion. You can be certain that by announcing a firm WP grand opening date on August 22, all systems will be go.
There have been two major factors pushing the grand opening originally scheduled for March. One, construction delays at the contractor level that are covered with severe penalty clauses if they can't be laid at the door of force majeure events. Two, anyone who knows the company well understands that employee training there aims at developing a higher than average level of operational competence on the casino floor and off. But equally vital is imbuing the highly personalized service culture that has been a Wynn signature for decades. His Palace staff will be composed of many Macau veteran employees who have already bought into the ethos. Yet the company is known for never taking anything for granted. And this means training on top of training that eats more time.
3. Will the Las Vegas strip take a hit from the vote? Emphatically no for the time window between where Wynn trades today and where it can move over the next 90 days. We think during that period there's a strong chance that Wynn will move back up and even edge past the $103 a share high it attained two weeks ago. We're keeping our longer-term guidance at $135.
What neither we nor anyone else can comfortably forecast is if and when a full blown recession hits the US over the next year and inflicts damage on the Las Vegas strip. We're getting too many conflicting opinions from the economic chattering classes to make any kind of rational call as to the impact on the Las Vegas sector from Brexit. Homegrown negatives do persist in the US economy. Much of that won't be clear until after the November elections. At this point it's best to examine the present REVPAR rolling numbers out of Las Vegas, the forward booking convention and meetings business, and the tour and travel packaging numbers. And what we see based on our best information at the moment is no developing weaknesses in any revenue sector there. Wynn's forward pacing is moving ahead, thus far untouched by Brexit trauma. As we've indicated in a prior post, visitation from EU nations comprise far too small a percentage of international business for Las Vegas to bruise its increasingly positive tone at the moment.
You can't remove the apples from the pie after its baked and call it a lump of crust. The two Wynn projects already in the pipeline will happen. Both will become significant EBITDA contributors to the 2018 to 2020 periods and are baked into the $100 plus trade and more. This supports our long held Wynn mantra on SA, namely Wynn is a stock for long-term players who understand the track record, the earnings power and the singular genius of Wynn in creating resorts that churn more money per table, per room on average, than most of its competitors. The Brexit swoon presents an opportunity to buy in at a price we believe offers a solid value equation. You buy it now because the imminent opening of this spectacular property - even in a wounded market - is a dynamic. You buy it for later because you believe that the pipeline promises to add to earnings in a disproportionate ratio to investment. You buy it because you believe that Macau will recover it's only a matter of when and to what new normal running GGR.
Over-performing markets is in WYNN's DNA.
Just a bit of history lest any SA reader think I'm overly biased toward this company.
1. I recognize Wynn has stubbed its toe more than once. First in overbuilding its Beau Rivage riverboat project in Mississippi - a bad miscalculation of what would work in that market in 1999.
2. Wynn allowed himself to be outfoxed by MGM's Kirk Kerkorian in 2000 when his Mirage Resorts shares had tumbled from $26 down to $10. This was partially because of the disappointing performance of the aforesaid Beau Rivage as well as what Wall Street considered his wasteful accumulation of French Impressionist art amounting to the hundreds of millions and the poor earnings profile. "Steve took his eye off the ball," said one industry colleague who worked for Wynn at the time. "There's no question about it. I also think he was fed up with Wall Street's short-term performance demands and Kirk stepped in and got a crazy bargain."
3.In his early days Wynn's volcanic temper ran many of his best key people ragged in pursuit of his perfectionist mentality. Among them were strong producers who left the field of battle rather than endure raging phone calls at 2 in the morning about some miscue that day. Yet to a person, till this day, all agree he was a singular genius far too prickly for his own good sometimes. But he later mellowed and went on to coin money for shareholders both from Las Vegas and Macau. He was and is in many way both positive and negative, the avatar of Steve Jobs.
Conclusion: Brexit has delivered an opportunity that has made Wynn very cheap and if you believe in long-term track records, a built-in 14% upside could now be awaiting you.
About the author: Howard Jay Klein is a 25+ year veteran c-level casino executive and consultant He is the author of Mastering the Art of Casino Management and the publisher of The House Edge premium site on Seeking Alpha. His own gaming portfolio is in a blind trust for his family in order to avoid conflict of interest problems with past, present and future 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.