There’s no question that the last two years have been horrible for shareholders of Wynn Resorts, Limited (WYNN). At this point, the stock is down more than 75% from its all-time highs in early 2014.
A big part of the problem for Wynn started in Macau, the world’s largest gambling hub, when the local government began a crackdown on corruption in the gambling industry. However, Wynn’s issues in Macau have recently been compounded by general weakness in the Chinese economy.
It’s now up to Wynn traders to determine if the 75%-plus discount from the stock’s 2014 highs makes WYNN stock a value or whether China’s recent woes make it a value trap.
The Bear Case
If you’re bearish on WYNN stock, you certainly have plenty of ammunition to fire. Not only is Macau’s monthly gross gaming revenue down more than 50% from its 2014 highs, it continues to fall by the month. December’s 21.2% year-over-year decline marked the 19th consecutive month of falling revenues in Macau. As long as that trend continues, Wynn bears have a valid argument that a rise in share price is unlikely.
In addition to troubling revenue trends, Wynn’s rising debt level is also fuel for the bear case. Wynn has borrowed heavily in recent years to fund the construction of its more than $2.2 billion 1,700-room Wynn Palace resort scheduled to open on the Cotai strip in Macau sometime in 2016. WYNN stock’s current debt-to-equity ratio is an uncomfortable 1.58, its highest point since the Financial Crisis. However, it is still well short of its 2008 highs:
Finally, with China reporting its weakest growth numbers since 2009 this week, a complete economic meltdown in China would certainly put a damper on disposable income levels and be disastrous for the Macau economy.
The Bull Case
Despite the numerous headwinds for WYNN stock, there is still a compelling case that Wynn is well-positioned for a comeback. First of all, even though China’s full year 2015 GDP growth of 6.9% was its lowest growth in the past 25 years, it is still a very strong showing for an economy of its size and well above any growth numbers the U.S. has put up in recent decades. While many other global economies are fearing recession, China’s economy is still growing at nearly a 7% rate.
Secondly, despite only a 50% or so drop in gaming revenue in Macau, WYNN’s stock price is down more than 75% from its highs, indicating that a great deal of further Macau downside has already been priced into the stock. If and when Macau’s revenue numbers show definitive signs of stabilization, Wynn shares could see a nice bounce.
From a value perspective, the stock’s current forward P/E ratio is only 18.8, near the bottom of its five-year range:
Perhaps the most powerful argument that Wynn’s stock is currently a good value is the fact that its CEO and 40-year casino industry tycoon Steve Wynn bought $60 million of Wynn stock in the open market in the low-to-mid $60’s just last month. It’s one thing for a CEO to voice his confidence in a company, but it’s a whole different level of belief to make a $60 million bet on a comeback.
Takeaway
Considering all of the uncertainty surrounding China and Macau, a long bet on a Wynn comeback may not be for the faint of heart. However, with the stock reasonably valued from a historical standpoint and with fears of further revenue declines in Macau already priced in, patient investors who buy now and stomach the short-term volatility will likely be handsomely rewarded when Macau recovers down the road.
As of this writing, Wayne Duggan was long WYNN.
