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Stock Analysis & Ideas

Wynn Resorts: Valuation Leaves Small Margin of Safety

I am neutral on Wynn Resorts (WYNN) as it has a strong competitive position, Wall Street analysts are generally bullish on it, and the average price target implies good upside. However, the stock’s valuation does not offer a large margin of safety based on its historical average forward EV/EBITDA ratio.

Wynn Resorts is a publicly-traded company that operates in the hospitality and gaming industry. The company focuses on creating high-end casinos and hotels and was founded in 2002 by Steve Wynn. Steve is the former CEO and Chairman of Mirage Resorts. The company’s current CEO is Craig Billings. As of 2020, the company had six properties. Steve decided to create Wynn Resorts when he sold Mirage to MGM Grand for $200 million.

Strengths

Apart from being an experienced player in the industry, the company has time and time again benefited from its financial stability, which ultimately translates to improved profits. The company’s investors, shareholders, and employees are more inclined to stay committed to its relatively stable business model.

These qualities allow the company to enjoy improved profitability, expansion, and a holistically stable operation. This also suggests that the company’s core competency or unique selling proposition lies in aggressive expansion. This also provides them access to an incredibly diverse range of markets.

Recent Results

In the fourth quarter, Wynn’s revenue was $1.05 billion compared to $686 million for the same quarter last year. The revenue reported by the casino totaled $145.9 million, while it totaled $159.8 million in the same period last year. Revenue from the Food & Beverages and Rooms segments fell 38.6% and 20.4% and stood at $11.6 million and $15.5 million.

Moreover, during the fourth quarter for Wynn, Retail, Entertainment, and Other revenues also declined by 9.9% year-over-year and stood at $21.1 million. In the VIP section, the turnover from games stood at $1.19 billion, which also showed a stark decline of 57.6% year-over-year.

Valuation Metrics

WYNN stock looks just slightly undervalued here, as it trades below its historical valuation multiple average on a forward enterprise-value-to-EBITDA basis. Its forward EV/EBITDA ratio is 14.8 times compared to its historical average of 15.8 times. Moving forward, analysts expect EBITDA to increase by 123.9% over the next twelve months.

Wall Street’s Take

Turning to Wall Street, WYNN earns a Moderate Buy consensus rating based on four Buys, seven Holds, and no Sell ratings assigned in the past three months. Additionally, the average Wynn Resorts price target of $110.75 puts the upside potential at 26.2%.

Summary and Conclusions

WYNN stock is backed by a portfolio of high-quality entertainment and hospitality assets and businesses. Furthermore, it is expected to recover strongly in the coming years as the world emerges from COVID-19 headwinds. Wall Street analysts are also generally bullish on the stock here, and its average price target implies good upside over the next year.

On the other hand, the valuation is close to its historical average, leaving only a small margin of safety. However, if the company can successfully emerge from COVID-19 headwinds, it may see some upside ahead. That said, if investors wish to be extra conservative, they might want to wait for a further discount in the stock before adding shares.

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