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</TD></TR><TR><TD vAlign=top><TABLE width="100%" valign="top"><TBODY><TR><TD>Is Wynn Worth $9 Billion?
Nov 30, 2006
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Wynn Resorts' market cap finished the day at exactly $9 billion on Monday. Throw in net debt, and Wynn's total enterprise value stands at about $9.6 billion. A couple of years ago, I ingeniously talked myself out of investing in Wynn at $17 per share, only to watch the stock quintuple. Whoops. But after reading Wynn's financial statements and doing some rough calculations, I've concluded that despite the stock's nosebleed level, it has enough upside for speculators willing to roll the dice. However, it also has enough downside to keep out value investors looking for a margin of safety.
The value of any company can be examined in three parts: what is, what should be, and what could be. That means a company's intrinsic value is the sum of whatever the company currently owns (such as cash in the bank), the cash that the company can reasonably be expected to produce in the next few years (discounted to present value), and any extra value that management may or may not produce by way of shrewd capital allocation. I broke down Wynn this way, using the same approach I always employ in doing my calculations: I use very rough estimates to get a notion of intrinsic value and then ask for a big discount to that value. I'd rather be vaguely right than precisely wrong. So let's take a look at the three components of Wynn's value.
What is
Wynn operates the $2.7 billion Wynn Las Vegas casino, which occupies 55 acres on the Vegas strip. The casino is on track to produce around $1.2 billion in sales. If so, it should produce earnings before interest, taxes, amortization, and depreciation (EBITDA, a proxy for normalized cash flow) of around $250 million. Given Steve Wynn's strong track record, it's not too much of a stretch to assume $350 million to $400 million in cash flow within a few years. As a result, we could put a quick and dirty multiple of 10 on the cash flow to give us a value of $3 billion to $4 billion for the Vegas Wynn casino. That seems like a reasonable figure, given that the casino cost $2.7 billion to build, and assuming that it's worth more than its replacement value.
Wynn also has a golf course sitting on 142 acres adjacent to its casino. This land is hard to value. Recently, a 27-acre parcel of land on the Strip was sold for almost $17 million per acre. If we conservatively haircut this price down to somewhere between $5 million and $10 million per acre, we arrive at a valuation of $700 million to $1.4 billion for Wynn's golf acreage.
What should be
Wynn Macau opened last September. Even though opening a casino in Macau is like taking a sip of water from Niagara Falls, Macau gaming is still ridiculously lucrative for a myriad of reasons, including proximity to affluent Asian gamblers, Asian affinity for gaming in general, and a booming Chinese economy. In the first month after Wynn Macau opened, its table games produced net gaming wins of $9,200 per day. In contrast, Wynn Las Vegas' table games produce $7,300 per day -- a stunning difference. Wynn Macau's slot machines also edged out Las Vegas' daily win rates by a margin of $387 to $250 per day.
So what's the Macau casino worth? If we crudely extrapolate the first month's results, we end up with $650 million in annual sales. We can assume that much more of these sales will translate into cash flow, given the higher-margin nature of gaming sales, so let's say that the Macau operations can produce $250 million in normalized cash flow. And given the tantalizing prospects, we'll put a multiple of 12 on this. Doing that gives Wynn Macau a $3 billion value.
What could be
The many moving pieces and crude estimates have already given me a headache, but it gets even trickier. Wynn's planning a Las Vegas expansion called Encore that adds 54,000 square feet in gaming space and 2,042 rooms. If we use the existing Las Vegas casino's numbers as a proxy, I estimate that Encore, which will cost $1.74 billion, will produce about $650 million to $700 million in sales and roughly $250 million in cash flow, for a $2.5 billion valuation.
In Macau, Wynn's looking to develop the remaining 5 acres it's allotted, with plans to add up to 300 additional table games and 135,000 square feet in gaming space. Trying to value this eventual development is almost impossible. Using the $9,000-per-day win rate of Wynn Macau's existing tables, these 300 new tables would produce almost $1 billion in gaming sales. I find this difficult to believe, so I'll arbitrarily haircut this number and say that the second phase of expansion could add around $600 million in sales and $250 million in cash flow, for a roughly $3 billion future value. Wynn has also applied for a 54-acre addition to its Macau license. I don't care to speculate on the probability of approval or the value of the land, but more land would create a substantial upside.
Although it seems hard to believe that Wynn Macau, which will cost a total of $1.2 billion to complete, could be worth $6 billion, it's also worth noting that Wynn recently resold a Macau subconcession right -- basically a license to operate a casino in Macau -- for $900 million. In other words, Wynn's Macau license is so valuable that its resale rights basically allowed it to build the first phase of its Macau casino for free. Also worth noting is that the Macau gaming license expires in 2022.
Keeping up with the Sands
The bad thing about the casino industry is that it's a constant game of one-upmanship. Because casinos inevitably get bigger and badder, there's an incessant need to spend money on upgrades in an attempt to fend off the threat of capacity increases. In Las Vegas, Las Vegas Sands (NYSE: LVS) is building a 3,025-suite tower, Boyd (NYSE: BYD) is building a $4 billion complex including 5,300 rooms and 140,000 square feet in casino space, MGM Mirage (NYSE: MGM) is building a $7 billion development including 4,000 rooms, and a new casino, the New Frontier, is being built with 2,771 rooms and 104,000 square feet of gaming space. In contrast, Wynn Las Vegas cost $2.7 billion and has 2,700 rooms and 111,000 square feet in gaming space, so the future capacity additions are substantial. Likewise, Macau is also guaranteed to see casino capacity skyrocket.
Foolish final word
The point of this exercise isn't to put a precise value on Wynn but rather to try getting a vague notion of where the numbers are coming from. If I add up the sum of the parts, I get future value of $13 billion. If I discount this figure, I'd probably come much closer to the $11.6 billion enterprise value I'd get if I were to add Wynn's $9.6 billion enterprise value to the $2 billion it'll cost to finish development of the Encore and Macau expansions. In other words, it's likely that Wynn is trading at around fair value.
Keep in mind that I took many shortcuts in coming up with these numbers. As of now, I'm uncomfortable with the stock's valuation, given the many assumptions I had to make, my inability to make precise estimates, and the looming threat of capacity increases. So I'm wary of the stock. However, I'm always keeping my eye out for a chance to buy shares of Wynn at a discount wide enough to overcome future uncertainties. When I'm gambling on gambling stocks, I'd prefer to speculate only when I can substantially limit my downside risk. In that sense, Wynn doesn't win for me. By Emil Lee
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<CENTER><TABLE cellSpacing=0 cellPadding=0 width="100%" border=0><TBODY><TR><TD>Gaming Investor </TD></TR></TBODY></TABLE></CENTER>
</TD></TR><TR><TD vAlign=top><TABLE width="100%" valign="top"><TBODY><TR><TD>Is Wynn Worth $9 Billion?
Nov 30, 2006
</TD></TR><TR><TD>
Wynn Resorts' market cap finished the day at exactly $9 billion on Monday. Throw in net debt, and Wynn's total enterprise value stands at about $9.6 billion. A couple of years ago, I ingeniously talked myself out of investing in Wynn at $17 per share, only to watch the stock quintuple. Whoops. But after reading Wynn's financial statements and doing some rough calculations, I've concluded that despite the stock's nosebleed level, it has enough upside for speculators willing to roll the dice. However, it also has enough downside to keep out value investors looking for a margin of safety.
The value of any company can be examined in three parts: what is, what should be, and what could be. That means a company's intrinsic value is the sum of whatever the company currently owns (such as cash in the bank), the cash that the company can reasonably be expected to produce in the next few years (discounted to present value), and any extra value that management may or may not produce by way of shrewd capital allocation. I broke down Wynn this way, using the same approach I always employ in doing my calculations: I use very rough estimates to get a notion of intrinsic value and then ask for a big discount to that value. I'd rather be vaguely right than precisely wrong. So let's take a look at the three components of Wynn's value.
What is
Wynn operates the $2.7 billion Wynn Las Vegas casino, which occupies 55 acres on the Vegas strip. The casino is on track to produce around $1.2 billion in sales. If so, it should produce earnings before interest, taxes, amortization, and depreciation (EBITDA, a proxy for normalized cash flow) of around $250 million. Given Steve Wynn's strong track record, it's not too much of a stretch to assume $350 million to $400 million in cash flow within a few years. As a result, we could put a quick and dirty multiple of 10 on the cash flow to give us a value of $3 billion to $4 billion for the Vegas Wynn casino. That seems like a reasonable figure, given that the casino cost $2.7 billion to build, and assuming that it's worth more than its replacement value.
Wynn also has a golf course sitting on 142 acres adjacent to its casino. This land is hard to value. Recently, a 27-acre parcel of land on the Strip was sold for almost $17 million per acre. If we conservatively haircut this price down to somewhere between $5 million and $10 million per acre, we arrive at a valuation of $700 million to $1.4 billion for Wynn's golf acreage.
What should be
Wynn Macau opened last September. Even though opening a casino in Macau is like taking a sip of water from Niagara Falls, Macau gaming is still ridiculously lucrative for a myriad of reasons, including proximity to affluent Asian gamblers, Asian affinity for gaming in general, and a booming Chinese economy. In the first month after Wynn Macau opened, its table games produced net gaming wins of $9,200 per day. In contrast, Wynn Las Vegas' table games produce $7,300 per day -- a stunning difference. Wynn Macau's slot machines also edged out Las Vegas' daily win rates by a margin of $387 to $250 per day.
So what's the Macau casino worth? If we crudely extrapolate the first month's results, we end up with $650 million in annual sales. We can assume that much more of these sales will translate into cash flow, given the higher-margin nature of gaming sales, so let's say that the Macau operations can produce $250 million in normalized cash flow. And given the tantalizing prospects, we'll put a multiple of 12 on this. Doing that gives Wynn Macau a $3 billion value.
What could be
The many moving pieces and crude estimates have already given me a headache, but it gets even trickier. Wynn's planning a Las Vegas expansion called Encore that adds 54,000 square feet in gaming space and 2,042 rooms. If we use the existing Las Vegas casino's numbers as a proxy, I estimate that Encore, which will cost $1.74 billion, will produce about $650 million to $700 million in sales and roughly $250 million in cash flow, for a $2.5 billion valuation.
In Macau, Wynn's looking to develop the remaining 5 acres it's allotted, with plans to add up to 300 additional table games and 135,000 square feet in gaming space. Trying to value this eventual development is almost impossible. Using the $9,000-per-day win rate of Wynn Macau's existing tables, these 300 new tables would produce almost $1 billion in gaming sales. I find this difficult to believe, so I'll arbitrarily haircut this number and say that the second phase of expansion could add around $600 million in sales and $250 million in cash flow, for a roughly $3 billion future value. Wynn has also applied for a 54-acre addition to its Macau license. I don't care to speculate on the probability of approval or the value of the land, but more land would create a substantial upside.
Although it seems hard to believe that Wynn Macau, which will cost a total of $1.2 billion to complete, could be worth $6 billion, it's also worth noting that Wynn recently resold a Macau subconcession right -- basically a license to operate a casino in Macau -- for $900 million. In other words, Wynn's Macau license is so valuable that its resale rights basically allowed it to build the first phase of its Macau casino for free. Also worth noting is that the Macau gaming license expires in 2022.
Keeping up with the Sands
The bad thing about the casino industry is that it's a constant game of one-upmanship. Because casinos inevitably get bigger and badder, there's an incessant need to spend money on upgrades in an attempt to fend off the threat of capacity increases. In Las Vegas, Las Vegas Sands (NYSE: LVS) is building a 3,025-suite tower, Boyd (NYSE: BYD) is building a $4 billion complex including 5,300 rooms and 140,000 square feet in casino space, MGM Mirage (NYSE: MGM) is building a $7 billion development including 4,000 rooms, and a new casino, the New Frontier, is being built with 2,771 rooms and 104,000 square feet of gaming space. In contrast, Wynn Las Vegas cost $2.7 billion and has 2,700 rooms and 111,000 square feet in gaming space, so the future capacity additions are substantial. Likewise, Macau is also guaranteed to see casino capacity skyrocket.
Foolish final word
The point of this exercise isn't to put a precise value on Wynn but rather to try getting a vague notion of where the numbers are coming from. If I add up the sum of the parts, I get future value of $13 billion. If I discount this figure, I'd probably come much closer to the $11.6 billion enterprise value I'd get if I were to add Wynn's $9.6 billion enterprise value to the $2 billion it'll cost to finish development of the Encore and Macau expansions. In other words, it's likely that Wynn is trading at around fair value.
Keep in mind that I took many shortcuts in coming up with these numbers. As of now, I'm uncomfortable with the stock's valuation, given the many assumptions I had to make, my inability to make precise estimates, and the looming threat of capacity increases. So I'm wary of the stock. However, I'm always keeping my eye out for a chance to buy shares of Wynn at a discount wide enough to overcome future uncertainties. When I'm gambling on gambling stocks, I'd prefer to speculate only when I can substantially limit my downside risk. In that sense, Wynn doesn't win for me. By Emil Lee
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