Wednesday, September 14, 2011

Don't Gamble on Wynn Resorts

Wynn Resorts (NYSE: WYNN) enjoyed a 208% rise in its second quarter earnings -- an impressive performance. Should you place a bet on its stock?

What's interesting about Wynn is that its been able to grow revenues over 33 times faster than the U.S.'s 0.7% rate of economic growth. This casino operator’s earnings growth was driven by a 22.8% increase in revenues including a 22% rise in room rates.

But is this fast growth enough of a reason to buy its stock? Here are two reasons to consider it:
  • Decent earnings reports. Wynn has been able meet or beat analysts' expectations in three of its past five earnings reports and missed by a penny in the two others.
  • Out-earning its cost of capital and getting better. Wynn is earning more than its cost of capital – and it’s improving. How so? It’s producing positive EVA Momentum, which measures the change in “economic value added” (essentially, after-tax operating profit after deducting capital costs) divided by sales. In 2011, Wynn 's EVA momentum was 12%, based on six month annualized 2010 revenue of $3.9 billion, and EVA that improved from six month annualized 2010's -$192 million to six month annualized 2011's $256 million, using a 12% weighted average cost of capital. Here are two reasons to pause:
Here are two reasons to avoid it:
  • Very high valuation. It trades at a Price-Earnings-to-Growth ratio of 3.85 — a P/E of 50 on earnings forecast to grow 13% to $6.19 in 2012 after a 161% rise in 2011.
  • Higher sales but plunging profits and more debt-laden balance sheet. Wynn sales have grown at a 31.6% annual rate over the last five years from $1.4 billion (2006) to $4.2 billion (2010) but its net income has plunged at a 29% annual rate from $629 million (2006) to $160 million (2010) -- yielding a thin 4% net margin. Its debt has risen -- but its cash is up faster. Specifically, its long term debt rose at an 8.4% annual rate from $2.4 billion (2006) to $3.3 billion (2010) while its cash climbed at a 13.3% annual rate from $789 million (2006) to $1.3 billion (2010).
If Wynn can keep up its rapid earnings growth over the longer run, then its current valuation will look cheap. But if earnings forecasts are accurate for 2012, this stock is very over-valued. Given its spotty record for beating expectations, I would consider buying Wynn at a lower price but avoid it for now.


Blogger Kenneth said...

I think the management of Wynn Resorts is excellent in handing the business. But because of this consistency it attracted a lot of attention, making it's stock prices soar higher. I would not buy it for now, I might wait for the next recession and bet everything I have on it.

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