First-time recommendation Wynn Resorts (nasdaq: WYNN) is one of the most well-known casino operators in the world. With Wynn Las Vegas, Wynn Macau and newly opened Encore Las Vegas (December 2008), CEO Steve Wynn and his company are premier players in the casino industry. Having personally been to the two Las Vegas properties, I can attest to their grandeur and lavishness and I am certain that the Macau property shares the same traits.
Despite the obvious concerns about the global economic slowdown, a number of factors attract us to WYNN, starting with Steve Wynn himself. In 1989, The Mirage became Steve's first major casino in Las Vegas. His strong emphasis on luxury helped build the city into what it is today. The ensuing transformation led Steve to build Treasure Island and the Bellagio, the latter bringing 'true luxury' to Sin City.
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Clearly, the financial health of many of the casino operators has come into question given the turbulence in the credit markets. We remain comfortable with Wynn for a number of reasons. The first is that both Wynn Las Vegas and Macau are nearing profitable run rates. Second, the company has a tremendous amount of land on the books, 142 acres in Las Vegas to be exact. Given the market rates, some think that is worth nearly $10 per share. Finally, the debt position appears far more manageable than some of its competitors and Mr. Wynn has been much more conservative with the speed at which he builds new casinos and has made it clear he has no intentions of beginning a new project any time soon.
While cash flows could be a concern for some, we expect that they will hold up well enough to keep the Wynn from needing to refinance its debt on undesirable terms.
It's evident we like the story and prospects for the company, but the fundamentals aren't too shabby either. Presently, operating margins are close to 15% and with room to grow upon the casino's maturing, we could see strong EPS gains as revenue ramps in the long-term considering the untapped potential in Macau. At the moment, the best stock trades for 8 times trailing earnings and less than two times tangible book value. In addition, Wynn's management has a penchant for treating shareholders well through special dividends and share buybacks. While we do not expect any in the near-term, we will not be surprised if they recur down the road.
EPS projections for 2009 are not surprisingly substantially below what was seen last year--we need to keep in mind that investors have abandoned the casino space as WYNN shares commanded a price nearly $100 higher a year ago. We think that while the near-term worries are certainly valid, demand will eventually pick up, the credit markets will loosen and the industry will recover with the strongest players leading the way, headlined by WYNN. We are buyers up to $27.00 with our LG and FG at $54 and $45, respectively.
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