Analysts Implore Wynn CEO Maddox to Hold Onto Boston Property at All Costs

Posted on: June 19, 2019, 03:21h. 

Last updated on: June 19, 2019, 04:27h.

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

Just days before Wynn Resorts. Ltd. (NASDAQ: WYNN) is slated to open the Encore Boston Harbor, a trio of Bernstein analysts want to remind CEO Matt Maddox of the strategic importance of Beantown, beseeching him to not again consider selling the highly anticipated property.

Wynn CEO Matt Maddox seen here in April in an appearance before the MGC. Analysts are hoping the company doesn’t revisit selling its Boston casino. (Image: Commonwealth Magazine)

Scheduled to open June 23, the $2.6 billion Encore Boston Harbor has been a source of controversy for Las Vegas-based Wynn. Early last month, the company appeared poised to pay $35.5 million in fines to the Massachusetts Gaming Commission (MGC), including a $500,000 levy aimed at Maddox, to quash allegations that the casino operator covered up sexual misconduct claims against founder Steve Wynn while it was trying to land a Bay State gaming license.

Less than three weeks later, reports emerged that Wynn was considering selling its Boston property to rival MGM Resorts International (NYSE: MGM). Within days, those talks were scuttled, indicating Wynn would move forward with opening what is expected to be one of New England’s premier gaming destinations.

Still, Bernstein analysts Vitaly Umansky, Eunice Lee and Kelsey Zhu felt compelled to reiterate support for Wynn sticking with Encore Boston Harbor while expressing relief the company is no longer considering a sale of the property.

“It was with dismay that we saw news of potential sale discussions for the yet to be opened property between WYNN and MGM,” said the analysts in an open letter to Maddox and Wynn’s board. “While the discussions were quickly terminated, the news of such discussions even occurring so close to opening were disheartening. Matt’s recent comments about no longer looking to sell is a welcome initiative.”

Big Opportunity in City on a Hill

While shares of Wynn Resorts are up 23.34 percent year-to-date, the stock was drubbed in May as investors fretted about companies with exposure to the lingering US-China trade dispute. Last year, the casino operator derived about 75 percent of its operating revenue from Macau, the only Chinese territory where gambling is legal.

The Bernstein analysts see Encore Boston Harbor as an important step in diversifying Wynn’s revenue stream and altering investors’ perceptions that the stock is merely a China trade.

“By 2020E, over 41% of Wynn Resorts’ EBITDA (adj. for minority interest)would be derived from US properties, amongst which, 16% of the totals should be derived from Encore Boston,” said the analysts. “Boston is too big to be ignored – and Wynn Resorts may finally be perceived as more than a ‘high beta China macro’ trade.”

Bernstein said it expects Encore Boston Harbor to be a “regional champion,” eventually sporting earnings before interest, taxes, depreciation and amortization (EBITDA) exceeding those of rival properties, such as the MGM Grand Detroit, MGM National Harbor and the Borgata in Atlantic City.

Runway For Success

Among the factors the Bernstein analyst believe Wynn’s Boston property has in its favor are demographics, location and a clear competitive moat.

The analysts note Massachusetts has the second-highest per capita GDP in the US and that Eastern Massachusetts is one of the most affluent “local catchment areas” in New England.

Additionally, Bernstein sees little competitive threat from MGM’s Springfield, Massachusetts property because that casino targets a “different demographic” than the Encore will. Connecticut’s tribal gaming properties – Foxwoods and Mohegan Sun – are about 100 miles from Boston, “but these properties are nowhere near the same caliber as Wynn’s property,” according to Bernstein.

The research firm has an “outperform” rating on Wynn with a price target of $156, well above Wednesday’s closing price of $122.32.

What’s a High Beta China Macro Trade?

Beta describes a stock’s sensitivity to swings in the broader market. For example, a stock that typically overshoots the broad market’s moves in either direction would be considered “high beta.”

In terms of Wynn Resorts being viewed as a “high beta China macro trade,” what that means is due to the company’s current dependence on Macau for a major chunk of its revenue, its stock is sensitive to headlines affecting the broader Chinese economy and markets.

A real time example of Wynn’s high beta China status was the stock’s May slide. Conversely, if positive gaming data from Macau emerges or the US and China are able to reach a trade accord, the shares could potentially rally.