Don’t Be Fooled By WYNN Stock’s After-Earnings Jump (WYNN)

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Are the bulls seeing something the rest of the markets are not? Contrarian hopes for Wynn Resorts (WYNN) ping-ponged between opposite sides of the table.

WynnResorts185WYNN stock dropped 2% immediately following a lackluster earnings performance for the second quarter of fiscal year 2015 but then charged back the following day, jumping to an 8% lead in the afternoon session.

Past reports hadn’t been great for Wynn. Heading into the report release, WYNN stock had a “four-quarter negative average earnings surprise of 14.16%” according to Zacks Equity Research, and Q2 didn’t break that trend.

Wynn posted 74 cents per share — 23% lower than the Wall Street consensus. So, when looking at Thursday’s surge, investors have to wonder, is the WYNN stock rally for real?

WYNN Stock Still Feeling the Pain

Fundamentally, the bull case is a tough one to swallow. The international casino industry absorbed major body blows in the form of a broad Chinese government crackdown on corruption in gambling-haven Macau.

The scope of posited solutions — which include the monitoring of potentially illegal transactions and the tightening of visa requirements — have heavily affected the province’s high-rollers, and in turn, ate away at WYNN stock’s revenue stream. In total, Wynn Resort’s Macao division in June witnessed a nearly 36% drop in net sales from a year earlier.

But the pain wasn’t just limited to global catalysts. Wynn earnings also suffered losses in its core Las Vegas business, which shed 6.2% in revenue. The Las Vegas weakness is perhaps more concerning for Wynn Resorts, which has seen its rival Caesars Entertainment Corp. (CZR) teetering on the verge of total collapse “after a federal judge refused to protect casino company from creditor lawsuits seeking up to $11 billion,” according to a Reuters report.

While this isn’t to suggest that Wynn Resorts will necessarily follow suit, Caesars’ virtually imminent demise should put a damper on the myth that all “sin industries” are recession-proof.

The casino giant will need to straighten things quickly if management wants to avoid a similar fate — which is easier said than done. The balance sheet for WYNN stock is particularly rancid, with rising long-term debt liabilities and decreasing on-hand cash values contributing to a total assets to total liabilities ratio running consistently in the red.

Additionally, over the past four quarters, Wynn earnings reports have revealed a revenue-to-cost ratio in decline — essentially, each dollar of sales-generating expenses is yielding lower return on investment.

WYNN stock, earnings
Source: Source: JYE Financial, unless otherwise indicated

As expected, the technical prospects for WYNN stock is rather bleak. Arguably the biggest hurdle is investor psychology, which has crippled momentum in the markets. WYNN stock is down 30% year-to-date, and over the past 52 weeks shares have lost approximately 53%.

Given the rapid unwinding of Wynn Resorts’ capitalization value over the past few months, there’s a heavy sense of foreboding that the relative calm in the markets right now is merely the precursor to a bearish consolidation phase — any more corporate or industry hiccups and there could be further pain to come for WYNN stock.

Certainly, Thursday’s 8% jump is a reason for anyone holding WYNN stock to celebrate. However, it’s probably also a reason to sell. Given the company’s inability to generate revenue efficiently and its heavy debt levels, WYNN stock is more a liability than an asset.

As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.

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A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. Tweet him at @EnomotoMedia.


Article printed from InvestorPlace Media, https://investorplace.com/2015/07/reversal-hopes-dashed-wynn-resorts-sinks-wynn-stock/.

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