by Lawrence Meyers | January 17, 2014 1:26 pm
Don’t get me wrong, I think Wynn Resorts (WYNN) CEO Steve Wynn is one of the greatest businessman in the history of America. He’s a legend in Las Vegas and for good reason. Like his competitors, Wynn broke ground in Macau ages ago, and has been reaping the rewards ever since.
However, there are macroeconomic issues that concern me about gaming, even though Macau now pulls in seven times the revenue that Las Vegas does. There’s excessive optimism priced into WYNN stock. I’ve written in the past that enough variables exist in gaming to make WYNN stock a trading vehicle, not an investing vehicle.
The issue with resort-casinos as investments is that, regardless of their geographical location, these are businesses that depend too much on the whims of individuals. The hotel/resort side of the equation is dependent upon both the health of the world economy so that tourism remains robust, and that a given resort is considered a “go-to” property.
WYNN always strives to be one of the top resorts regardless of where the hotels are located, but that’s is ultimately subject to the whimsical tastes of tourists.
When Vegas really took off in the early 1990’s, I would go several times a year, and watch how one hotel would be hot and then lose its cool factor as the next new place opened. Tourists can be very fickle in this regard, and that means an investor is gambling on something unquantifiable when it comes to WYNN stock.
That takes me to the global economy in regards to WYNN. The entire world is overleveraged. All the growth of the past fifty years has come from borrowing. Economies are rotting from the inside out. Even a minor economic shock to any given country that use Macau and Vegas as tourist destinations could set back both resort and gaming revenue.
Sure, the house stacks the gaming odds in its favor, but lower volume means lower revenue. Resort-casinos are tourist destinations, so they are equally if not more economically sensitive than business hotels — another uncertainty built into WYNN stock.
The other problem with WYNN stock is that it is difficult to assign a valuation to it, because EPS ebbs and flows with a lot of volatility. EPS rose during FY13 from $5.26 per share to $7.13 per share, an increase of more than 33%. Yet analysts only see 7% EPS growth in FY14. So is WYNN stock deserving of a 33x multiple, or a 7x multiple, or something in between?
WYNN trades at 27.5x Fy14 estimates. It doesn’t appear that FY13 operating cash flow will exceed that of FY12, so what is the “right” price for the stock? It’s too difficult to say, and that’s why I can’t suggest WYNN as an investment.
However, that inability to peg a valuation is exactly why I think WYNN stock is a trading stock. Right now, it’s at its all-time high. With all of these aforementioned uncertainties, there’s no way I would pay $210 per share. If you hold WYNN stock, you should sell it now.
It’s also the kind of stock where I would employ some technical analysis to assist with buy and sell points. In my opinion, I’d wait for a 50% retracement of the gains it has made since it bottomed in 2012 around $94, so look to re-enter around $150. And if you are particularly aggressive, you could even go short WYNN stock in anticipation of that retracement.
Just keep WYNN stock away from your long-term holdings.
As of this writing, Lawrence Meyers did not hold a position in any of the aforementioned securities. He is president of PDL Broker, Inc., which brokers financing, strategic investments and distressed asset purchases between private equity firms and businesses. He also has written two books and blogs about public policy, journalistic integrity, popular culture, and world affairs. Contact him at firstname.lastname@example.org and follow his tweets @ichabodscranium.
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