Wynn Resorts Rallies on Goldman Sachs Upgrade, Bank Says Investors Are Too Pessimistic

Posted on: September 24, 2019, 08:51h. 

Last updated on: September 24, 2019, 02:28h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Wynn Resorts, Ltd. (NASDAQ:WYNN) stock rallied Tuesday, rising by more than two percent after Goldman Sachs analyst Stephen Grambling raised his rating on the casino operator. Grambling said investors have gotten too downbeat on the stock amid weakness in Macau.

Goldman Sachs raised its rating on Wynn Resorts, lifting the stock in a big way. (Image: Fortune)

Entering Tuesday, shares of Wynn were higher by 9.30 percent year-to-date, less than half the 2019 gain of the S&P 500. The stock has also been a middling performer among gaming equities this year, trailing some rivals, such as MGM Resorts International (NYSE:MGM), which is higher by 18% in 2019.

Amid a slowdown in China’s economy, trade hostilities between that country and the US, and the recent pro-democracy protests in Hong Kong, gross gaming revenue (GGR) in Macau has languished in recent months, pressuring shares of operators there, including Wynn.

Earlier this month, the operator of the Wynn Macau and Wynn Palace projected operating revenue for the two-month period ending Aug. 31 of $1.01 billion to $1.12 billion, well below the $1.15 billion it posted for the year-earlier period. The company cited weakness in the Macau VIP market as one of the primary culprits behind that gloomy forecast. The Chinese territory accounted for 70 percent of Wynn’s second-quarter revenue.

Still, Grambling believes Wynn can reconnect with high end gamblers in Macau, and that investors have gotten too pessimistic about stocks, with exposure to the Chinese Special Administrative Region (SAR).

Even with an outright macro contraction in China, we believe downside to the stocks is 3%-17% if the historical multiple holds,” said the Goldman analyst, referencing Wynn, Las Vegas Sands Corp. (NYSE:LVS) and MGM.

Grambling raised his rating on Wynn to “buy” from “neutral” while ratcheting up his price target on the stock to $155 from $140, implying upside of nearly 40 percent from Monday’s close. The consensus sell-side target on the stock is around $137.

Vegas, Too

In warning about softness in Macau for the first two months of the third quarter, Wynn also issued similarly glum commentary about its home market of Las Vegas, saying that table game win percentage there in July and August was well below expectations of 22 percent to 26 percent.

Grambling believes the company’s ambitious cash flow plans, including a target of $16 per share in cash by 2021, coupled with new products coming online, could serve as catalysts for the stock.

Wynn’s newest property is Encore Boston Harbor. That Massachusetts integrated resort debuted on June 23 and posted July GGR of $48.57 million, a tally that jumped to $52.48 million last month, indicating the venue is on its way to becoming a dominant force among New England casinos.

Attractively Valued

As Wynn stock struggled against the backdrop of sliding GGR in Macau, a frequent battle cry of supporters was that the shares were too inexpensive to ignore. Grambling echoes that sentiment, applying it to not only Wynn, but rivals LVS and MGM, too.

The Goldman analyst said valuations on the three equities are so depressed that they reflected a contraction in GGR this year that would be comparable to that of 2008 during the global financial crisis.

Seven analysts covering Wynn rate the stock “buy,” while six have the equivalent of an “outperform” mark on the name. Another seven call the shares “hold.”