Wynn Resorts: Watch For Massive NYC Catalyst (NASDAQ:WYNN)

Wynn Resorts, Limited (NASDAQ:WYNN) operates casinos in the United States, as well as the Macau area with around a 72% ownership, known for the Wynn Las Vegas, Wynn Palace, Wynn Macau, and other locations. The company’s current US operations have bounced incredibly well from COVID-time earnings, with Macau operations still waiting for better tourist traffic for a complete recovery.

Wynn’s efforts in additional locations are the company’s most interesting catalyst ahead. There is a midterm launch of the currently constructed UAE location, as well as the decision for a massive New York casino investment being potentially decided in 2025 – Wynn could have great upside catalysts ahead for its earnings and stock.

In the past decade, Wynn’s stock has halved in price. While operative earnings have stayed quite stable, high debt and the COVID-19 pandemic’s negative effect on earnings have pushed the stock price down considerably. Wynn currently pays a dividend yield of 1.3%.

Earnings Profile: Las Vegas Has Performed Very Well, Macau Is Still Recovering

After the COVID pandemic’s restrictions that put the casino industry into turmoil, Wynn’s operations and earnings are finally nearing stabilization. Currently, after Q2, Wynn’s trailing Las Vegas revenues stand at $2581 million (2023 data) compared to just $1633 million in 2019 before the pandemic, consisting of increasingly better winnings per unit in gaming as well as higher food and entertainment revenues. Furthermore, hotel occupancy has even increased above Wynn’s pre-pandemic level in Las Vegas at 89.6% in 2023 compared to a lower 87.5% occupancy in 2019 – the Las Vegas market has clearly stabilized in the large picture.

As a result, Wynn’s Las Vegas segment’s adjusted property EBITDAR now stands at a healthy $967 million on a trailing basis with a healthy 2.8% year-on-year growth in Q2, also over doubling from the area’s $414 million 2019 EBITDA level. Wynn’s Las Vegas earnings have recovered incredibly very well from the pandemic to a considerably higher level. The post-2019 growth in earnings is also proportionally clearly better than Caesars Entertainment’s (CZR) Las Vegas growth from $1468 million adjusted EBITDA in 2019 into $2016 million in 2023. It is also slightly better than MGM Resorts’ (MGM) 2019-2023 increase from $1643 million into $3190 million in adjusted EBITDAR, being two very notable competitors in the Vegas Strip.

While having a worse recent earnings performance with a -4.2% revenue decline in Q2 in the Massachusetts resort due to an unusually low table hold, Encore Boston Harbor’s trailing adjusted property EBITDAR stands at $250 million. This is also greatly above the $23 million 2019 pre-pandemic level.

On the other hand, Wynn’s Macau operations are still recovering, as COVID restrictions caused longer-lasting effects in Macau. Still, the Macau segment is now also closer to stabilization – in Q2, Wynn Palace revenues were $548.0 million, up 17.0% from Q2/2023 but still down -12.9% from Q2/2019. Wynn Macau’s revenues were $337.3 million, 11.8% from Q2/2023, but still down a dramatic -38.3% from Q2/2019. Tourism is constantly increasing in the area closer to pre-pandemic levels, and with the recovery, Wynn still has room to grow earnings in Macau as tourist traffic improves.

Overall, Wynn’s current casino assets should be stable. While online operators like DraftKings (DKNG), which I previously wrote a bullish article on, continue taking some share from land-based operators, Wynn’s US operations look to still draw in a good amount of traffic. The Macau operations should still grow for a while from a more delayed post-pandemic normalization, but eventually stabilize into a greater earnings level. The Las Vegas operations’ over-performance compared to Caesars Entertainment and MGM Resorts is incredibly good, but the Wynn Macau location’s wide revenue drag from 2019 remains a slight concern.

Wynn has a leveraged balance sheet at a current $11.03 billion of interest-bearing debt. With the company’s now healthier earnings profile at a trailing $1.25 billion in operating income, I don’t believe that the debt is necessarily that large of a threat. Wynn also has buildings marked at $8.49 billion on the balance sheet, potentially enabling further sale-and-leasebacks to strengthen the financial position, as Wynn did in 2022 with the Encore Boston Harbor location.

Wynn’s Potential Entry into NYC Would Be Significant

Potentially being a massive earnings catalyst, Wynn is pursuing a location in Manhattan, New York, as the city is open for three new downstate casino licenses. The proposed project would be worth a staggering $12 billion, planned by Wynn and Related Companies. In the current proposal, the companies would add a Wynn New York City Resort as well as affordable housing and a public park as part of the project in Hudson Yards.

The project is still highly uncertain. The city of New York is still evaluating its options – a total of at least 12 proposals have been made regarding the bid for a New York City casino license. These include a Times Square skyscraper project by Caesars Entertainment and other parties, an expanded MGM Empire City Casino by MGM Resorts, and other proposals by Las Vegas Sands (LVS) and many others.

If Wynn’s and Related Companies’ proposal goes through, the potential could be massive for Wynn. The company related to New York City as a potential greenfield opportunity in the Q2 earnings call, as the city doesn’t have many notable casinos yet. Yet, New York City’s tourists reached 62.2 million in 2023 along with an 8.8 million population back in 2020, comparing well to the saturated Las Vegas market’s tourists of 40.8 million in 2023 with just a population of 642 thousand in 2020. The average tourist or resident clearly won’t spend as much on gambling in New York City as in Las Vegas. However, the city’s large tourist volume still speaks for very significant potential, especially given the low number of casinos in the city.

The $12 billion price tag would also be a hefty investment for Wynn as well, compared to the company’s current market capitalization of just $8.5 billion. The investment would likely require a good share of capital from other investors in the project as well, but the potential amount gained by the likely great traffic should outweigh the heavy investment if the project receives a license.

The final decisions on the approved casino licenses are only expected in late 2025, with bids still coming in until mid-2025. This makes the potential investment still highly uncertain for Wynn – for now, the project is still a short- to midterm stock catalyst and interesting prospect, dividing opinions of parties engaged in New York City’s development.

Entry into the UAE: Wynn’s Most Significant Ongoing Development

Introduced in April 2023, Wynn’s current most significant new casino construction is in the United Arab Emirates, where Wynn owns 40% of a joint venture for the construction of the Wynn Al Marjan Island project. The casino, expected to open only in 2027, expands Wynn’s global footprint into the UAE with a significant 5.6 million square feet property, slightly over half of the Wynn Las Vegas square footage.

The project is taking a good amount of capital – a total of $3.9 billion is estimated to be spent on the casino. After Q2, Wynn has deployed a total of $514.4 million for the project, and so far, a good portion of the spent capital has been spent on Wynn’s proportion of purchased land. For the project, Wynn expects around a $450-600 million adjusted property EBITDA at a mid-point return on investment of 13.5% after the location’s earnings have matured.

The investment should significantly boost Wynn’s total earnings once completed if traffic lives up to expectations. While the estimated adjusted property EBITDA yield is quite mediocre in my opinion, as the project comes with a potential traffic risk, the project still likely raises earnings very well from 2027 forward even with weaker traffic. This is a good earnings catalyst ahead of the potential NYC investment.

Valuation: Waiting for NYC Potential

I constructed a discounted cash flow (DCF) model to estimate a fair value for the Wynn stock. As the NYC project is highly uncertain in many aspects, I don’t estimate the investment in my DCF model yet.

With the current projects, Wynn’s revenue growth should gradually slow down to 2% in 2026 with short-term stabilization in the Macau operations. The 2027 opening of the UAE location should grow revenues well, though, and I estimate a 14% total revenue growth in the opening year, with slightly elevated growth afterward as well. With stable operations, Wynn’s locations will likely bring in slow, near-inflation growth, and I estimate a sustained 2% level.

As Macau locations’ revenues scale and as the UAE operations open, I believe that Wynn’s margin level should benefit from operating leverage into an eventual 20.5% EBIT margin from an 18.8% estimate in 2024.

Wynn only holds around 72% of Macau operations, and I estimate that factor into the cash flow estimates. Furthermore, as only around 40% of the UAE project is owned by Wynn, I estimate the project’s earnings to also only partly trickle into Wynn’s cash flows. The UAE casino project’s investments also worsen my cash flow conversion estimate from 2024 to 2027.

With the mentioned estimates, the DCF model estimates Wynn’s fair value at $84.73, around 9% above the stock price at the time of writing – the stock seems to currently be priced quite fairly, with slight upside with a successful UAE launch. The DCF model doesn’t account for the NYC project’s potential surplus value, though, which could make the stock a very interesting investment.

CAPM

A weighted average cost of capital of 8.65% is used in the DCF model. The used WACC is derived from a capital asset pricing model:

In Q2, Wynn had $174.6 million in interest expenses. With the company’s current amount of interest-bearing debt, Wynn’s annualized interest rate comes up to 6.33%. As the balance sheet currently remains quite leveraged, I estimate a long-term debt-to-equity ratio of 60%.

For the risk-free rate on the cost of equity side, I use the United States’ 10-year bond yield of 3.73%. The equity risk premium of 4.11% is Professor Aswath Damodaran’s estimate for the US, updated in July. I use Aswath Damodaran’s 1.34 estimate for the hotel/gaming industry as Wynn’s beta. Finally, I add an ESG add-on of 1.5% and a small liquidity premium of 0.25%, creating a cost of equity of 10.99% and a WACC of 8.65%.

Takeaway

Wynn Resorts, Limited has interesting earnings catalysts ahead. While Las Vegas & overall US operations have recovered incredibly well from the COVID pandemic, Macau’s tourism is still only ramping up with likely earnings growth still ahead. The company is also bidding for a massive $12 billion NYC casino project, acting as a massive catalyst, and the UAE project is slowly nearing the 2027 opening. The valuation could have significant potential, especially if the NYC project is granted to Wynn, but for now, I believe that a Hold rating for Wynn Resorts is prudent.