Is Wynn Resorts' Stock a Buy?

By Markets Fool.com

The market's bottom for Macau's gaming market remains unclear, but could now be time to jump into gaming stocks? It's the classic contrarian investing move, and given the weak performance of companies like Wynn Resorts over the past year, it's easy to think there's nowhere to go but up. But deciding whether Wynn Resorts is a buy will depend a lot on your investing horizon, and not just how Macau does this year.

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WYNN Chart

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The situation in Macau isn't pretty
The reason Wynn Resorts' stock is down so much in the past year is a rapid deterioration in Macau's gaming market. The region's gaming industry saw overall revenue decline 2.6% last year , but things got worse when gaming fell 30.4% year over year in December alone. And 2015 didn't start much better -- the region's January revenue posted a 17.4% decline from a year ago.

Although revenue has been fairly stable over the last three months, it remains unknown if this is the "new normal" or not. If the slowdown continues it would be terrible for Wynn's stock since nearly two-thirds of its EBITDA comes from Macau.

And while Macau has struggled, earnings in Las Vegas have remained fairly steady, a big departure from the recession when Las Vegas almost brought down the gaming industry.

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Las Vegas is solid, but not spectacular
Wynn Las Vegas is easily the most profitable property in Las Vegas, but it's also tough to get excited about a resort that could grow long-term at mid-single digits at best. In 2014, the property generated $515.2 million in EBITDA, but like Macau, baccarat play struggled. On The Strip baccarat play was down 28.8% in the fourth quarter. This has a huge impact on Wynn because it's a favorite game of Asian high rollers and is actually the highest grossing game on The Strip.

Unlike Macau, Wynn Las Vegas isn't nearly as dependent on gaming for profit, generating a majority of its revenue off the casino floor. Non-gaming actually grew steadily in the fourth quarter, but we won't see big growth in Las Vegas and the most investors should expect is a steady stream of cash coming from the property.

Wynn Palace, the next new resorts from Wynn Resorts. Image source: Wynn Resorts.

Future value is compelling
If you look at Wynn Resorts as it is today, the stock isn't very compelling given Macau's struggles and limited upside in Las Vegas. But investors should look beyond these short-term challenges and analyze future opportunities.

Below I've provided a look at the company's value by looking at its enterprise value, net debt plus market cap, compared to its EBITDA, a proxy for cash flow. I usually look for an EV/EBITDA value below 10 unless there's a reason to think growth will be significant in the future.

In Wynn's case, growth will come from Wynn Palace in the Cotai region of Macau, a property that could more than double the company's EBITDA when it opens in 2016. Below I've shown the company's current value and the impact Wynn Palace will make if it earns $1.5 billion in EBITDA, only slightly more than Wynn's current Macau resort and a very conservative estimate given Steve Wynn's profit leadership among every market in which he operates.

Enterprise Value

EBITDA

EB/EBITDA Multiple

Wynn Resorts Today

$19.8 billion

$1.77 billion

11.2

Wynn Palace Impact

n/a

$1.50 billion

n/a

Wynn Resorts Future

$19.8 billion

$3.27 billion

6.1

Source: Wynn Resorts earnings reports and author's own calculations.

Including Wynn Palace, the EV/EBITDA multiple of 6.1 is incredibly cheap, especially when you consider that Wynn had just $7.3 billion in debt at the end of 2014, giving it fairly low leverage in the gaming industry.

Add in the stock's dividend payment of $6 per year for a 4.1% dividend yield, and I think there's more value than most investors think.

The short-term performance of Wynn Resorts' stock will depend on whether Macau's gaming market recovers or declines in 2015. But long-term investors should keep in mind the upside potential from Wynn Palace, which could double the company's profits. It's that upside that makes the stock a great buy if you're willing to hold on for years, which is always what Foolish investors should have in mind.

The article Is Wynn Resorts' Stock a Buy? originally appeared on Fool.com.

Travis Hoium owns shares of Wynn Resorts, Limited. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.