Wynn Resorts (NASDAQ:WYNN) is back to its winning ways. On Wednesday, Wynn stock spiked 13% higher, continuing a robust rally in recent days. In fact, the stock has rallied as much as 40% since its recent low. It’s an encouraging turnaround, to say the least.
It isn’t just traders making short-term moves, either. Wynn is bouncing back thanks to improving views on the company’s business outlook and liquidity situation.
After a dismal month for gaming stocks, is the worst of it finally over? There is reason for optimism thanks to the following developments.
A Reassuring Bond Offering
Given the uncertain severity and duration of the novel coronavirus-induced economic shock, it’s imperative that companies have plenty of cash to endure the resulting short-term problems. A company like Wynn is seeing a tremendous decline in gaming and other related activities. And given that they have destination properties, traffic is likely to remain subdued for months until folks feel comfortable taking long-distance trips again.
With these challenges in mind, Wynn decided to use the recent upturn in market sentiment to raise funds. And they absolutely nailed the timing on it. Why do I say that?
Initially Wynn was only planning to raise something in the neighborhood of $300 million in new bonds. Given the high demand for Wynn’s offering, they were able to massively increase the size of the deal. Wynn managed to pull in $600 million at a not-too-bad interest rate of 7.8%.
Best of all, the debt won’t be due until 2025. By then, the economy should be well into a strong growth cycle again. Keep in mind that other struggling companies have had to pay much more for debt. Carnival Cruise Lines (NYSE:CCL) sold bonds at a greater than 11% per year interest rate, to give one recent example.
JPMorgan Remains Bullish on Wynn Stock
On Wednesday, JPMorgan Chase stuck to its guns. Despite everything that has happened, JPMorgan’s analysts kept their “outperform” rating on Wynn. What does JPMorgan like about the company now?
For one, revenues haven’t come to a nearly complete halt, like they have for some other travel and entertainment-related stocks. JPMorgan estimates that Q1 revenues will be down 43%, which is bad, but could have been significantly worse. More importantly, Wynn has plenty of cash and funding sources to make it through the next few quarters.
With $3 billion in funding available, JPMorgan estimates that Wynn has enough cash to carry on through next summer. Unless the economy remains shut down much longer than expected, that should be plenty to meet Wynn’s needs.
The Strong Will Survive
One of the best points in favor of Wynn is its size. Wynn is one of the largest publicly-traded gaming companies. That gives it strength both from a scale perspective, and also in that it has more geographical diversification than many of its rivals. As a result, Wynn’s shares held up much better than many rivals during the March crash.
Other companies like Eldorado Resorts (NASDAQ:ERI) and Penn National Gaming (NASDAQ:PENN) saw their shares fall more than 90% peak-to-trough during the crash. If you really want to gamble, those are the stocks to take a look at now. Not surprisingly, shares of those distressed firms bounced back even more sharply than Wynn in recent days. But that’s because they’re true lottery tickets.
Keep in mind that the recent CARES Act really didn’t do a whole lot for the gaming industry. And smaller companies like Penn have troubled balance sheets, making it hard to raise additional money from the private market. If the government doesn’t backstop casinos, those sorts of gaming companies could see their luck run out.
Wynn, by contrast, has everything it needs to power through this dark stretch. In fact, given the problems elsewhere, Wynn may be able to add to its empire, buying up gaming assets from other embattled firms in coming months.
Wynn Stock Verdict
I agree with JPMorgan to a large part. Wynn looks like a survivor. The company has great properties, and it has the balance sheet flexibility to get through this crisis period. Given all that, Wynn should be one of the companies that overcomes this dark year and returns to strong profitability for its existing shareholders.
That said, you should always be careful in volatile market conditions like this. Wynn’s shares did just jump from under $50 to $70 in the span of a few days. Any sort of negative economic news or increase in the spread of the virus could easily cause a significant retreat in stocks, with gaming names taking a particular hit.
It makes a lot of sense to pick up some Wynn during this bear market, but do consider waiting for another dip before taking a position.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.