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Wynn Resorts – The Best Bet In A Struggling Industry?


Resorts and Casinos as an industry have slightly underperformed the S&P 500 over the past 2 years. Over that same two-year span, Wynn Resorts has managed to beat both the industry and the index.  Wynn has positioned itself to take advantage of the casino boom in Macau, while others are left out due to limits on gambling permits and strict government oversight. The politics in China represent risk to Wynn, however over the long term, the Chinese government seems invested in helping to develop the area. Macau has fueled shaky growth and Wynn’s outperformance.

Wynn is a relatively good value compared to its competitors, trading at a P/E of 46 and forward P/E of 20. U.S.-based companies with similar revenues average a multiple of around 50 and a forward average of 25. Why would the market place a lower premium on Wynn?

The geo-political risks certainly are one aspect of the discounting and it is hard to quantify the value of that risk. Another, more quantifiable metric is Wynn’s profitability. When we look at median operating margin, the story does not become much clearer. Wynn has a median operating margin of 20% while its two closest competitors have margins of 12.4% and 7.2%. Profitability is not the explanation for Wynn’s discount either. Of course there are endless different measures that we could look at in order to explain the pricing discrepancy, but in the end it all comes back to the geo-political uncertainty. 


An outsized portion of Wynn’s revenue comes from Macau and the continuous threat of increased regulations from within the Chinese government, such as limits to the number of tables, smoking ban, employee restrictions, transparency deposits, etc., along with the unease between the U.S. and China could cause a sharp fall in business at the casino. Any of these scenarios coming to fruition would cause a sharp decline in earnings or force investors to think about Wynn's debt burden or decrease profitability, and in that time Wynn Resorts suddenly becomes expensive relative to the market. Wynn may currently be slightly cheaper than its competitors, but it faces a very volatile path.

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