There are two critical elements to casino/resort stocks like Wynn Resorts (NASDAQ: WYNN).
The first element you must understand is that these companies are partly in the hospitality sector. Hotel success is tied to GDP, so the business is cyclical. As it happens, right now the hotel sector is experience an “up” cycle.
There is more demand for hotels than there is supply, so room rates have been increasing. Occupancy has been doing very well, since travel in general has been growing at a faster rate than GDP.
The other element is gaming. There are few safer equity investments because in gaming the house always wins. That’s a great place to put your investment dollars, provided enough people get attracted to the tables, and the big whales spend lots of money there.
Wynn Resorts, and competitors such as Las Vegas Sands (NYSE: LVS) and MGM (NYSE: MGM), have one other advantage over other resort companies. A visit to their resorts almost always coincides with an intent to gamble at the casino. They aren’t strictly vacation destinations in the way, say, Hyatt Hotels (NYSE: H) is.
In the investment world, that can be a bad thing. Sometimes the gaming side can work against an otherwise stable hotel resort.
That’s why recent earnings results from Wynn and others have been mixed, whereas straight-up hotel plays like REITs are mostly doing very well. At this point, 70% of Wynn’s revenues come from its operations in Macau. If Macau falters, so does Wynn.
Net revenues for Macau fell 3% from last quarter and 1.4% YOY, but this was mostly due to gaming weakness at the VIP level. Gaming revenue fell by 23% in Macau last quarter, across all hotels in the region.
At Wynn specifically, EBITDA is falling but margin is improving, because hotel occupancy remains strong – 98.5% at Macau and 89.3% in Vegas.
Despite the rough quarter, Wynn remains a very solid company. It generates plenty of free cash flow and has $3.1 billion of cash on hand. It isn’t over-leveraged, with $7.3 billion allocated across its Vegas and Macau properties and the parent company.
However, because of volatility in the gaming revenue, its earnings can be unpredictable.
As a result of this unpredictability, I don’t advise owning casino/resort stocks as long-term investments. I prefer to rely on tangible and reliable EPS growth to help me determine a company’s fair value. Wynn, however, is really about cash flow, which varies from quarter to quarter. It’s difficult to value a company on an absolute basis using something like an EV-to-EBITDA ratio. I find that to be more useful when making relative comparisons.
Thus, I regard Wynn as a medium-term trading stock. Those are stocks I like to grab at trading lows, and then hold onto them for the medium term as they approach trading highs.
Let me get specific.
I’ve watched Wynn stock for many years, and I notice a pattern where the stock will trade within a given range for quite some time, then break out to a new high and form a new, broader trading range.
Right now, Wynn is near the bottom of that trading range. It trades at $180. Its 52-week low is $158, and its high is $249. So it’s about 15% off its low and almost 30% off its high. That 52-week low corresponds to the previous trading range breakout.
Sentiment is negative on the stock, which is why it has sold off. But here’s the thing – Macau is going to resolve itself in time. Soon enough the VIPs will return to the tables. What’s more, Wynn just got a deal to build a casino in Boston, and open up a whole new region.
In other words, it’s a good time to buy Wynn for a medium-term trade. Once the stock gets back to the $240 range, I’d look to get out of half your position for a nice 40% return, and hold the rest in case of another breakout. However, I’d also set a stop loss at $145, in case it breaches support.
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