While I have highlighted my bullish thoughts on Las Vegas Sands (LVS), I have not been clear enough about my bullish thoughts on Wynn Resorts (WYNN). Reviewing the fundamentals and valuing the business based on reasonable future standards, I find that the stock is currently trading around 36% under intrinsic value. In this article, I will run you through my DCF model on the company and then triangulate the result against the fundamentals of LVS and MGM Resorts (MGM).
First, let's begin with an assumption about the top-line. Wynn finished FY2011 with $5.3B in revenue, which represented a 25.9% gain off of the preceding year. I model a 14.2% per annum growth rate over the next half decade or so - a figure that I think errs on the conservative side, but I nevertheless accept for the sake of proving my point.
Moving onto the cost-side of the equation, there are several items to consider: operating expenses, capital expenditures, and taxes. I model cost of goods sold as 63% of revenue versus 9% for SG&A, and 7% for capex. Taxes are estimated at 15% of adjusted EBIT (ie. excluding non-cash depreciation charges to keep this a pure operating model.)
We then need to subtract out net increases in working capital. I expect this figure to hover around -1.3% over the explicitly projected time period.
Taking a perpetual growth rate of 2.5% and discounting backwards by a WACC of 10% yields a fair value figure of $183.14 for 36% upside. The market seems to be factoring in a WACC of 12.2%, which is much too bearish - especially in light of the 14.2% per annum growth assumption.
All of this falls within the context of a strong emerging market focus:
I checked with the gaming control board, and interestingly enough, our casino win in Las Vegas at $776 million last year was the all-time historical record for a gaming license facility in the state of Nevada's history. It exceeded the previous record of $764 million, which coincidentally, and delightfully enough, was held by Wynn Las Vegas in 2007. So in all in all, it was a good year, a lot of international business in America, a robust and wonderful season in Macau.
From a multiples perspective, Wynn is also attractive. The company trades at 27.7x past earnings but only 19.5x forward earnings. This compares to corresponding figures of 35.8x and 17.9x for LVS and 2.5x past earnings for MGM.
Consensus estimates for LVS' EPS forecast that it will grow by 32.7% to $2.68 in 2012 and then by 18.3% and 21.5% in the following two years. Assuming a multiple of 22x and a conservative 2013 EPS of $3.14, the stock would hit $69.08 for 23.6% upside. Like Wynn Resorts, LVS is also led by terrific management that has built up demand in areas benefiting from rising consumer expenditures.
Consensus estimates for MGM forecast that losses will decline 19.6% to -$0.45 in 2012 and then by 66.7% more before entering positive territory. While MGM is a highly risky investment due to how it is bleeding money, the potential for upside is meaningful as investor fear may be overblown. As it currently stands, analysts rate the stock around a "buy".
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