Wynn Resorts Analyst Finds Stock Interesting, Encouraged by Capital Allocation Plans

Posted on: July 16, 2019, 11:55h. 

Last updated on: July 16, 2019, 11:44h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

J.P. Morgan gaming and leisure analyst Joseph Greff finds shares of Wynn Resorts, Ltd. (NASDAQ:WYNN) interesting and is enthusiastic about the comments the company made regarding its capital spending plans at its recent analyst and investor day.

The Wynn and Encore on the Las Vegas Strip. A J.P. Morgan analyst is bullish on Wynn stock. (Image: TripAdvisor)

In a new research note, Greff reiterated an “overweight” rating and $155 price target on shares of the Wynn and Encore operator, implying upside of 11.5 percent from where the stock currently trades.

At the analyst day held last week from the newly opened Encore Boston Harbor, Wynn forecast a 22 percent increase in revenue by 2021 and a 28 percent jump in earnings before interest, taxes, depreciation, and amortization (EBITDA) over the same span while estimating its gross gaming revenue (GGR) in Macau will rise at a compound annual growth rate (CAGR) of 3.5 percent.

Greff called Wynn’s guidance on Macau, the company’s most important market, “conservative,” noting that management publicly acknowledged as much.

With the stock implying a high single/low double digit free cash flow yield and investor sentiment still skeptical/apathetic towards Macau and China exposed stocks, we find the shares interesting,” said Greff in the note.

Wynn said it expects to generate $1.68 billion in free cash flow by 2021, the equivalent of $16 a share in cash, which would put the company in the upper echelon of gaming industry cash flow producers.

Marvelous Macau

Shares of Wynn Resorts are higher by more than 17 percent this month due in large part to a cooling in trade tensions between the US and China. Economic hostilities between the two countries previously hampered shares of casino operators with Macau exposure, sending those stocks, including Wynn, tumbling in May.

The trade situation between the world’s two largest economies has progressed to the discussion stage and while the scenario remains fluid, Wynn is reaffirming its commitment to China’s gambling center. At the investor day, the company unveiled plans for the $2 billion Crystal Pavilion, which will be located near Wynn Palace.

Crystal Pavilion is expected to have 1,300 rooms, high-end museums, interactive gardens, glitzy dining options and technology theaters, features aimed at bolstering Wynn’s non-gaming offerings in Macau. The company is estimating a 20 percent return on investment from the project.

“It will include an immersive theatre, partner with world-class art museums, have an Asian gourmet food pavilion and art sculpture gardens, and have a ‘gong spire,’” said Greff. “Construction is expected to commence in late 2021 and take 36 months to complete, and WYNN expects 7-10 million annual visitors.”

Shareholder Rewards

At the analyst and investor day, Wynn highlighted the fact that its dividend has doubled in less than two years and that it remains committed to “sustainable” payout growth while noting the firm could periodically entertain the idea of special dividends. The company also said it repurchased $157 million of its stock in fourth quarter of 2018.

J.P. Morgan’s Greff sees Wynn’s more robust cash flow potentially leading to increased shareholder rewards in the future.

“We maintain our favorable view on WYNN here, reflecting (1) accelerating EBITDA in 2020 from key growth pillars (Encore Boston Harbor ramp, LV Strip convention space/golf course, and mass-focused Macau investments),” said the analyst. “And (2) a steady path to deleveraging, with 2021E year-end net leverage declining to 2.4x and setting up for capital return along the way (further increasing recurring dividend, buybacks).”