The COVID-19 pandemic has been rather disruptive for many companies operating in the hospitality, travel and tourism sectors, including casino operators like Wynn Resorts (NASDAQ:WYNN). On March 18, WYNN stock hit a 52-week low of $35.84. Now the price is hovering around $57.
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Has Wynn stock seen the bottom in March? There are no easy answers to this question. Although it may look like the price cannot get much lower than this, our economy is going through an uncertain period right now.
“The harder question is will investors increase their investments in this present uncertain economic environment due primarily to the coronavirus pandemic. Investment changes are more volatile than changes in the growth of an economy (changes in GDP),” said Dr. Albert Williams, professor of finance and economics at the H. Wayne Huizenga College of Business and Entrepreneurship Nova Southeastern University.
“In summary, increased consumer spending and investments in the near future is not clear,” he continued. “People are all very concerned with this major pandemic and hence only necessary spending will take place. This will impact luxury expenses, including vacations.”
So let’s take a closer look at why investors may still want to exercise caution before investing in casino shares in April.
WYNN Stock and the Pandemic
The group owns and operates a portfolio of casinos, including Wynn Las Vegas, Encore Boston Harbor, Wynn Macau, and Wynn Palace, Cotai.
In order to get a better appreciation of how Wynn’s operations in the U.S. may be affected, let’s take a look at what happened in their overseas operations first.
Earlier in February, Macau authorities had closed all casinos for several weeks. Macau is currently the only jurisdiction where it is legal to gamble in China. During the closure in February “gross gambling revenues fell nearly 90%.”
Although Macau casinos are now open, business has not yet picked up. There are still various travel restrictions. And customers are likely to avoid crowded areas for some time to come.
Wynn Macau which is traded on the Hong Kong Stock Exchange has recently released its annual report for FY 2019. Management said “the Coronavirus outbreak has had and will have an adverse effect on our results of operations. Given the uncertainty … we cannot reasonably estimate the impact on our future results of operations, cash flows, or financial condition.”
The group also highlighted that during the closure, it was losing more than $2 million a day.
Although various reports indicate that the outbreak might have already peaked in China, at this point coronavirus fears are still quite high in the U.S.
Casinos are crowded venues. To slow the spread of coronavirus, Wynn management also announced closures stateside.
On March 14, “[I]n consultation with the Massachusetts Gaming Commission, Encore Boston Harbor … announced that it will be closed to the public for two weeks.”
Then the next day the group “decided to temporarily close Wynn Las Vegas and Encore as part of its continuing effort to reduce the spread of COVID-19.”
It also promised to pay employees during the crisis.
And finally last week, CEO Matt Maddox announced that company executives and board members would take stock in place of salary through 2020.
Will Wynn Resorts Ask for Government Help?
Understandably the pandemic is not only affecting citizens’ wellbeing but also hurting global economies. On March 27, President Trump signed the legislation, called the CARES Act, that will provide over $2 trillion in stimulus to the U.S. economy.
Earlier in March, gaming industry had joined airlines and various other groups in asking for government financial help. As the details of the bill have become public, it is clear that businesses that receive aid will not be able to pay dividends or buy back their own shares.
It may still be too soon to say how most casino operators will deal with the given uncertainty in the coming months. If a global recession is already here, then the worst may not necessarily yet be behind for Wynn stock.
If these businesses decide to apply for government help after all, then they’d also need to stop their dividend payments as well as share buybacks.
Wynn stock’s current dividend yield is about 5%, a highly attractive amount to collect under normal circumstances. But management may have to decrease or fully cancel the dividend during the year.
In such a case, the beaten-down WYNN shares may not be able to deliver robust returns in 2020. However, on a more optimistic note, J.P. Morgan analyst Joe Greff believes WYNN stock is undervalued.
What To Expect From Q1 Earnings
Wynn stock is expected to release Q1 earnings in early May.
When it reported Q4 and year end 2019 results in February, investors were not impressed. Both revenue and earnings missed estimates.
Revenue came at $1.65 billion, a decline of 2.0%, or $34.1 million, from $1.69 billion for the fourth quarter of 2018. Management blamed the decrease on the poor performance by Wynn Palace, Wynn Macau and Las Vegas operations.
The group also announced an adjusted loss of 62 cents per share. A year ago in Q4, it had reported adjusted earnings per share of 95 cents. The gaming operator said that the bottom line was especially hurt by operating loss at Encore Boston Harbor as well as declines in operating income in Macau and Las Vegas operations.
In several weeks, expected Q1 numbers will no doubt show that Wynn’s business is being negatively affected by these difficult times. However, it’s not yet quite possible to know the extent of the damage on company earnings.
Therefore, if you’re not yet a shareholder, you may want to wait before committing any capital into WYNN stock.
It may be several quarters before Wynn management builds the business back up. In the meantime, unfortunately for current investors, the share price could come under further pressure.
Investor Takeaway on Wynn Stock
In general, investors regard casino shares as robust businesses to own. After all, the house always wins over the long term, however, the health and economic effects of the novel coronavirus seem to be beating the house at this point.
Therefore, I still find it too risky and early to own shares of casino operators, such as WYNN stock, in a long-term portfolio. But if you’ve some spare risk capital, then you may consider taking a gamble on these stocks.
Things for the average citizen and the economy will eventually improve later in the year. Yet I believe there might be better ways to play a potential rebound in our economy.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, she did not hold a position in any of the aforementioned securities.
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