Shares of Wynn Resorts (NASDAQ: WYNN) have surged 55% higher in 2017, driven by a recovery in Macau and renewed confidence that projects in Las Vegas and Boston will pay off in the end. And with Wynn's growing debt load of $9.8 billion and net debt of $7.0 billion, it's important for the company to continue to grow.
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What investors should keep in mind is that there's a lot of potential ahead. And Wynn could be much bigger than it is today just a few years from now.
Macau's potential is far from tapped
One of the factors driving gaming stocks like Wynn, Las Vegas Sands (NYSE: LVS), and MGM Resorts (NYSE: MGM) higher in 2017 is the recovery in Macau's gaming market. In the first seven months of the year, gaming revenue was up 18.9%, and it shows no signs of slowing down. That's good for everyone, but it's not the reason to be bullish on Wynn Resorts.
When Wynn Palace was completed last fall on the Cotai region of Macau, it was ahead of a few other major construction projects. MGM Cotai, across the street, is still being built, as is SJM's new property, and the light rail has created a mess around Wynn Palace. It's like going to Las Vegas and finding the sidewalk all around the Bellagio is closed, and taxis can't get there from the airport. You would just go down the street to another casino if you were traveling through the area.
Construction will take some time to complete, but when it's done, Wynn Palace will be the first stop on the light rail after getting off the ferry and will have a fountain show that should attract millions of people every year. The resort could generate north of $250 million in property EBITDA each quarter, up from the $87.4 million in EBITDA it generated in the second quarter. That's a lot of growth potential, and that level of cash flow will make the debt load look reasonable before long.
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Las Vegas has more to give
Investors shouldn't expect much growth out of existing Las Vegas assets, but Wynn has an untapped asset that it will be developing in the next few years. The Wynn Las Vegas golf course is going to be torn out and turned into convention area and a 28-acre lagoon where guests can eat, drink, and catch a tan. The budget isn't set yet, but Wynn has turned down original plans to spend $400 million to $500 million on Paradise Park, so capital investment will likely be below that level.
What Wynn likes with the space is that conventions are in high demand in Las Vegas, and they bring customers willing to spend heavily on rooms, food, and beverages for their guests. That's all high-margin business for Wynn Resorts, and it will increase traffic in the casino, not to mention the increased shopping space the addition could provide. It's low-risk growth at the company's flagship resort.
Boston may pay off in spades
I've been skeptical of Wynn's $2.4 billion plan to build Wynn Boston Harbor just outside of downtown Boston. The east coast gaming market is becoming saturated, and I wasn't sure if the location was good enough to attract customers who would pay high room rates.
But the success of MGM National Harbor outside of Washington, D.C. may indicate that a large convention, hotel, and gaming facility near downtown could be a profitable project. If Wynn were to generate a 15% return on the investment, it would imply that Wynn Boston Harbor could generate $360 million in property EBITDA when completed. That's a lot of money, but if anyone can do it, it's Wynn Resorts.
Wynn's growth phase has just begun
I think there's at least as much as $1 billion in annual property EBITDA growth on the horizon with these three projects, and if that's true, Wynn's stock could be an incredible value. The company's enterprise value/EBITDA over the trailing 12 months is 13.8 today, but if you add $1 billion to EBITDA, the ratio falls to 8.3, which is a great value for gaming stocks.
It'll take some time for Wynn's growth plans to play out, but as they do, investors have a lot of upside ahead.
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