Shares of Wynn Resorts, Limited (WYNN) have declined 25% over the past 12 months. The stock touched its 52-week low of $90.11 in late July, and has slightly recouped some losses after a rally to the current price of $113.02. Is Wynn Resorts a good buy? I am of the view that the stock's risk/reward profile is still not attractive enough to warrant a buy decision, based on the following four reasons:
1. The WYNN stock is still not attractively priced relative to the company's fundamentals (see table below). Compared to a set of WYNN's competitors including MGM Resort (MGM), Las Vegas Sands (LVS), and Melco Crown (MPEL), WYNN has substantially slower growth prospects.
Analysts on average predict the firm's revenue, EBITDA, and EPS to grow at 2-year CAGRs of 2.3%, 5.1%, and 12.3%, respectively, over the current and next fiscal years. These rates are largely below the peer averages of 16.0%, 15.0%, and 22.8%, respectively, despite for the fact that WYNN has a large revenue exposure (73.1% of the LTM revenue at June 30, 2012) to the Macau casino market.
WYNN also has a huge debt burden reflected by its 90.2% debt to capitalization and 3.7x debt to EBITDA rate. Nevertheless, the company has a superior profitability and especially for its ROE and ROIC, which are 50.5% and 11.1% on an LTM basis, significantly outperforming the peer averages. Due to the robust profitability margins, WYNN is able to maintain an in-line interest coverage ratio at 4.5x. Both the current and quick ratios are above the averages, reflecting WYNN's healthy balance sheet.
Factoring in both the strengths and weakness, I believe it would be reasonable that the stock trades on par with peers. The current stock price of $113.02 implies an average valuation premium of 8% over the peer-average NTM EV/EBITDA and NTM P/E multiples, suggesting that the stock is somewhat fully valued. In addition, despite for the slower growth potential, WYNN's PEG at 0.8x is also more stretched than the peer average of 0.7x (see table above).
2. If we compared WYNN solely to LVS, which represents a very close comparable peer to WYNN due to the similar revenue exposure to Asian market and firm size, the conclusion would be the same - WYNN's valuations are again not favorable (see table below). WYNN underperforms LVS in growth potential, balance sheet measures, leverage, and profitability margins, and only has better capital return and free cash flow generation. Nevertheless, the stock trades at 7.4% valuation premium to LVS' two trading multiples and has a higher PEG.
3. Compared to its own financial conditions exactly a year ago, WYNN's growth estimates have been substantially slashed (see table below). The firm's leverage level has grown by more than 50% and the LTM FCF margin has reduced to 15.9% from 20.9%.
Some significant improvements for the company would be the net income margin as well as the ROE and ROIC. Given all those, WYNN's NTM EV/EBITDA and NTM P/E multiples have only come down by an average of 17%. Due to a sharp drop in the earnings estimates, the firm's PEG ratio has actually gone up by 53.8% to 0.8x from 0.5 over a year. As such, the stock's valuations may not have been sufficiently corrected by the market and this implies that the stock has become pricier.
4. However, WYNN's development of its new Cotai resort would serve as an attractive medium-term catalyst for the stock price, and the stock's current dividend yield of 1.8% is also a nice bonus.
Bottom line, due to the lack of a sufficient margin of safety on this investment, I would not recommend buying the shares at the current price. But considering the firm's Cotai resort development, which may generate positives in the near term, I advise either acquiring the shares after a pullback or selling out-of-money puts at a strike price below $100.
Charts are created by author and all financial data is sourced from Capital IQ and Morningstar.
Disclosure: I am long LVS.