Just six months ago, everything looked so good for Wynn Resorts (NASDAQ: WYNN). The casino operator was coming off an excellent year during which its stock had soared 94% -- a better result than any of the other global gaming companies with solid footholds in Macau, China.
Among the factors that lifted Wynn shares to near record highs in 2017:
- Wynn Palace had a full year of operation in the Cotai district of Macau, and generated over $500 million in revenue per quarter as the VIP market recovered.
- The $2.4 billion Wynn Boston Harbor resort was on track to open in mid-2019, giving the company a major East Coast location that is better situated than MGM Resorts' (NYSE: MGM) nearby Springfield casino.
- The company began development on its ambitious Paradise Park project on the former golf course behind Wynn Las Vegas and the Encore hotel, and purchased a large swath of land across the street that was once the site of the iconic New Frontier casino.
- Japan's legislature moved to legalize casino gambling and Wynn was viewed as having strong potential to win a lucrative casino license there.
So Wynn Resorts was on a hot streak and outperforming peers such as Las Vegas Sands (NYSE: LVS), which was being held back by its commitment to mass market gamblers in Macau; MGM, which missed the early stages of Macau's recovery because of delays in opening its MGM Cotai resort; and even Melco Resorts & Entertainment (NASDAQ: MLCO), whose stock jumped 84% last year.
Image source: Wynn Resorts.
Then in February, it all quickly unraveled as founder and Chairman Steve Wynn faced allegations of sexual misconduct. The ensuing scandal and investigations drove him to resign, then sell his entire stake in the company that still bears his name.
In the wake of the allegations, gaming regulators here and abroad began to take a much closer look at Wynn Resorts' licenses. In Boston, there is still substantial doubt about whether the company will be able to retain the license for its Boston Harbor casino. Though it changed the name of the resort to Encore Boston Harbor in an effort to appease regulators, some wonder whether the entire corporation needs a new identity.
Even in Macau, many remain concerned that regulators may not renew its concession, or might otherwise restrict it. And in Japan, rivals like Melco Resorts are now seen as having better chances of securing one of the few licenses likely to be issued.
Risk abounds, but so does potential reward
Although the stock had continued to rocket upward in early 2018, rising another 20% from its year-end price, it has since lost all of those gains. Today, the stock is down about 9% for the year. Even with Steve Wynn out, substantial risk still hangs over the casino operator, because it may be determined that the resort's board of directors was complicit in the alleged misconduct. Moreover, the company has long said that much of its success and value was tied to directly to Steve Wynn, his name, and his prowess at development.
Yet there remains a lot of potential in the company and its stock. Elaine Wynn, Steve Wynn's ex-wife and the largest shareholder in the company with a 9% stake, is now a guiding star for the casino operator. She successfully led a proxy battle that pushed two of her husband's close allies on the board to resign, and saw her own candidates installed. If anyone can remove the stain of scandal that Steve Wynn attached to the resort, it's probably her.
Further, as my Motley Fool colleague Travis Hoium recently noted, by comparison to other world-class gaming companies, Wynn Resorts is cheap on many levels, particularly enterprise value-to-earnings before interest, taxes, depreciation, and amortization (EBITDA). And analysts still anticipate the casino operator will grow its earnings at a rate of 17.5% annually over the long term.
The company is not in the best position at the moment, and a lot of uncertainty remains. But it appears likely that the worst of the storm has passed for Wynn Resorts, and for that reason, investors ought to consider it a buy.
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