Decisive Expansions And Shareholder Returns Clash With Looming Profit Margin Squeeze

Key Takeaways

• Wynn Resorts' strategic focus on expanding in the UAE and enhancing offerings in Macau highlights a commitment to long-term growth and customer experience.
  
• Investments in developments and strategic land acquisitions illustrate a vision for future growth, with potential to significantly boost asset base and revenues.
  
• Challenges in Macau, financial strains from new projects, union costs in the US, and global economic factors threaten Wynn Resorts' margins and market share.

Catalysts

Designs, develops, and operates integrated resorts.

• High ROI development in the UAE is a forward-looking growth catalyst, pointing towards significant expansion and revenue generation opportunities, especially with Wynn Al Marjan Island, impacting future revenue and EBITDAR.
  
• Ongoing efforts to elevate the product offering in Macau with new F&B concepts and the development of a destination food hall expected to open in 2025 suggest a strategic focus on boosting revenue and enhancing the customer experience in a key market.
  
• Continuous capital return to shareholders through dividends and share repurchases demonstrates a commitment to shareholder value, with potential positive impacts on EPS and shareholder equity.
  
• The advancement of construction and development work, including equity contributions to the UAE venture and CapEx in Macau, indicates a strategic investment in future growth sectors, with potential long-term benefits for revenue and net asset value.
  
• Strategic land acquisitions, for instance, the purchase of land under Wynn Al Marjan and additional acreage for potential future development, indicate a long-term growth vision that could substantially increase the company's asset base and future revenue streams.

Assumptions

• Analysts are assuming Wynn Resorts's revenue will grow by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 12.2% today to 0.1% in 3 years time.
• Analysts expect earnings to reach $635.5 million (and earnings per share of $5.99) by about August 2027, down from $868.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $525 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.5x on those 2027 earnings, up from 9.8x today. This future PE is greater than the current PE for the US Hospitality industry at 19.7x.
• Analysts expect the number of shares outstanding to decline by 2.73% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 10.66%, as per the Simply Wall St company report.

Risks

• Elevated promotional environment in Macau may force Wynn Resorts to increase operating expenses or player reinvestment levels, potentially impacting margins if they try to maintain or grow market share.
  
• The significant equity contribution to the Wynn Al Marjan Island project in UAE and ongoing capital expenditures might strain the company's liquidity and impact its ability to return capital to shareholders or pursue other growth opportunities.
  
• Union-related payroll increases have led to higher operating expenses in the U.S., particularly in Las Vegas, which could affect net margins if such costs continue to rise or are not effectively mitigated.
  
• Market share fluctuations in Macau, due to strong competition and shifting customer preferences, could lead to volatility in revenue and challenge the company's ability to predict or sustain performance in this key market.
  
• The global macroeconomic environment, including currency valuation changes, inflation, and discretionary spending trends, poses a risk to consumer behavior and spending in luxury resorts and casinos, potentially impacting both gaming and non-gaming revenues.

Valuation

• The analysts have a consensus price target of $114.0 for Wynn Resorts based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $145.0, and the most bearish reporting a price target of just $87.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $8.2 billion, earnings will come to $635.5 million, and it would be trading on a PE ratio of 24.5x, assuming you use a discount rate of 10.7%.
  
• Given the current share price of $77.24, the analyst's price target of $114.0 is 32.2% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.