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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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Stock of the Week

Wynn Resorts

October 26th 2015

Wynn Resorts
Nasdaq Symbol: WYNN
Industry: Gaming
Price as of 10/26: $66.41

        So far so good this month. The major averages have been kind to investors so far in October. So far, the averages are up 7% in just three weeks on track for the 6th best October in history. The energy space remains under pressure while the healthcare sector has lost its leadership role. So far the Industrials look to take at last some of the leadership role. Recent highlighted stocks like United Tech, Boeing, and GM are performing very well. The best performing Industrial so far this month is GE trading at levels not seen since 2008. Even with the recent run up, the yield on GE is still above 3%. A lot of attractive dividend stocks out there. One tech company this week, Seagate upped their dividend boosting the yield up over 6%.  Seagate has been in a down trend and is lives in a cyclical business. Management's decision to hike the dividend gives investors hope that business may be on the upswing once again.  Another cyclical business is casinos and games fluctuating with the ebb and flow of global growth. This week we'll highlight one gaming company that's been on a downtrend or a losing streak to quote the sector. The stock of the week is Wynn Resorts. Steve Wynn, a native of Upstate New York, has had a successful career in the casino business. However expansion plans in the China district of Macau has put a damper on business of late with their economy slowdown. But with the stock down 70% from the 2014 highs, you'd hope a lot of bad news has been priced in. Earlier this month, China issued a statement they were working on plans to boost the Macau economy sending Wynn Resort's stock up early 50% in two weeks. The stock has since pulled back, but then got another shot in the arm when one director bought over $2 million worth of stock. Besides share buybacks, and dividend hikes, insider buying is one of my favorite indicators that a stocks downturn and lousy fundamentals are about to change. Wynn Resorts is not for every investor as the stock does have downside risk with a heavy debt load, but longer term China should get their economy rolling again and Wynn Resorts should benefit nicely from their renewed consumer spending.

No investor is buying Wynn Resorts for their current lackluster earnings. The company reported another disappointing third quarter. The company's earnings and revenues both fell on a year-over-year. The revenues for the third quarter fell by about 27% to $996.3 million, while profits fell even more. The operating income for the quarter fell by 54% and its net income fell by about 61.5%. The third quarter operating margin fell to 27.8% from 28.1%. The prime reason behind the weakness seen across the gaming sector is the slump in Macau's spending. The Macau region has seen revenues fall continually for the past one year. Wynn Resorts' Macao operations saw net revenues fall by 37.9% year-over-year to $585.1 million and EBITDA fell by 50% to $162.8 million during the same time frame. Even non-Casino revenue in the Macao region fell by 22% to $77 million. The Las Vegas business wasn't much better. The Las Vegas market operations also saw weakness with net revenues falling by 3.9% YoY to $ 411 million and casino revenues falling by 14.8% YoY to $152 million. Non-casino revenue was Wynn Resorts' only segment that saw minimal growth in the quarter growing just 1.9%, to $303.6 million.

Investors and analysts are hoping the dismal fiscal 2015 performance will turn around in 2016. Revenue is expected to grow by 21% in 2016, to $5 billion from $ 4.1 billion this year. Revenue is expected to further grow by 12.8% in 2017, to $5.6 billion. EBITDA growth is also expected to turn positive in 2016  growing 15% in 2016 from $ 1.2 billion from $ 1.1 billion. In 2017 it's expected to grow 22% to $1.5 billion. Similarly, EPS is expected to grow by 20% in 2016, to $3.72 a share and by 33% in 2017, to $4.94 a share.

The valuation for Wynn Resorts is not overly cheap. The earnings estimates have been coming down for a while and typically I don't like to buy stocks with deteriorating fundamentals, but with the stock down 70% from its highs, they just reported earnings and there were no further surprises and insider buying gives me confidence that the risk reward is improving. The current valuation for Wynn stands at 22 times earnings, 17 times reduced earnings for 2016, 13.5 times 2017 earnings and a little more than 1 times sales. Wynn Resorts has a small float so the earnings put share can fluctuate a lot. Current estimates are for $3 a share, but when the stock was riding higher two years ago, the earnings estimates were up in the $7.50 range, a big difference in just two years. The debt level is high at $8 billion another reason this stock is not for every investor. To cut into the debt, the company could cut its dividend which is large at $2 a share or 2.96% yield. Management made no indication of any dividend cut so current investors can enjoy the dividend while waiting for the fundamentals to improve. In the short term, the stock and the fundamentals remain under pressure. But insider buying is a good indication that longer term the stock is attractive based on better fundamentals.