The road to recovery is long for Wynn Resorts, but stock is a buy

The impact of coronavirus on the hospitality sector has been more widespread than most other industries. The recent performance of Wynn Resorts Limited (NASDAQ: WYNN) gives a sense of how the once-thriving industry has responded to the crisis.  The company, which generates about three-fourths of revenues from its Macau operations, has been hit hard by the dismal casino traffic.

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After the recent market mayhem, the recovery of Wynn’s stock has been quite stable so far. Since a rebound is certain – though there is no clarity as to how the market would emerge post-pandemic – the low valuation makes it an attractive long-term investment. The target price indicates that the stock would have decent growth but would remain under the $100-mark in the near term. Overall, it’s a buying opportunity no one would want to miss.

Mixed Outlook

The hotel chain ended fiscal 2019 on a low note, incurring a loss in the final months of the year after staying in the positive territory for a long time. What followed was expected – the company remained in loss in the first half of 2020 when the business was battered by the virus outbreak.

Needless to say, the impact on ancillary businesses was as severe as the core hotel business. Though the majority of Wynn’s facilities have been reopened, rebuilding the business to the pre-crisis level, especially the table games, is a tough task. For casino operators, some of the restrictions are going to stay until the safety concerns are fully resolved.

Tough Game

According to experts, gaming revenue would fall more than 50% this year — which is worse than the initial estimate — since it is a consumer discretionary segment. Casinos, both in Macau and Las Vegas, would have to wait for at least two years before the business returns to the pre-crisis levels. Being a COVID hotspot, Las Vegas has seen demand falling again in the current quarter, reversing the initial recovery.

“In Macau, the second quarter was similar to the first quarter. And what is good about Macau is the direction of travel, feels like progress. So I’m sure as all of you on this call that is watching noticed it every two weeks. There’s a slight reduction in the restrictions, travel restrictions going to Macau, whether it was eliminating the quarantine between the Guangdong province in Macau,” said Wynn’s CEO Matt Maddox during his post-earnings interaction with market watchers.

Focus on Macau

Though the management is in the process of reopening properties in regions where the curbs are being eased, growing worries over the sluggish improvement in the COVID situation might delay the process. The pandemic has left Macau deserted and the ripple effect of the total shutdown, though for a brief period in the case of Wynn, is being felt across business segments even after reopening.  

The stakeholders are pinning hope on the early withdrawal of curbs and resumption of travel from some parts of China where normalcy is restored. But, the muted demand can put pressure on pricing in the present condition wherein the majority of the bookings are short-term.

Cash on Hand

Meanwhile, the company’s balance sheet is fairly strong, despite the high debt. It ended the first half with a cash balance of nearly 4 billion. It needs to be seen whether the revised cost structure would help in maintaining liquidity, considering the cash burn that is expected when the reopening gathers pace.  

The table drop is down about 30%, but we’re down about 50% in terms of positions. So we can obviously break even in this environment with the opex reductions that we’ve done, and as that table volumes come back, we anticipate that not only will we generate pretty meaningful EBITDA, some of those expenses will come back.

Craig Billings, chief financial officer of Wynn Resorts

Weak Q2

The slowdown seen towards the end of fiscal 2019 and early this year was carried forward into the second quarter and Wynn reported a wider-than-expected loss of $6.14 per share. The top-line plummeted to $86 million from last year’s $1.7 billion and missed the estimates as operations were disrupted across all markets.

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Looking forward to listening to management/analysts’ comments on quarterly results? Stay tuned here for earnings call transcripts

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Wynn’s stock started the week slightly above $87, which is more than double the value recorded mid-Mach when it slipped to a five-year low. The shares witnessed a great deal of volatility in recent years and are currently trading below their long-term average. Since last year, there has been a 21% decline in the value.