Over the past six months, Wynn Resorts’s shares (currently trading at $95.86) have posted a disappointing 16% loss, well below the S&P 500’s 7.9% gain. This might have investors contemplating their next move.
Is now the time to buy Wynn Resorts, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Do We Think Wynn Resorts Will Underperform?
Despite the more favorable entry price, we don’t have much confidence in Wynn Resorts. Here are three reasons we avoid WYNN, plus one stock we’d rather own.
1. Long-Term Revenue Growth Disappoints
A company’s long-term sales performance is one signal of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Over the last five years, Wynn Resorts grew its sales at a 31.2% annual rate. Although this growth is acceptable on an absolute basis, it fell slightly short of our standards for the consumer discretionary sector, which enjoys a number of secular tailwinds.
2. Mediocre Free Cash Flow Margin Limits Reinvestment Potential
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
Wynn Resorts has shown poor cash profitability relative to peers over the last two years, giving the company fewer opportunities to return capital to shareholders. Its free cash flow margin averaged 10.2%, below what we’d expect for a consumer discretionary business.
3. High Debt Levels Increase Risk
Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.
Wynn Resorts’s $12.16 billion of debt exceeds the $1.80 billion of cash on its balance sheet. Furthermore, its 6× net-debt-to-EBITDA ratio (based on its EBITDA of $1.85 billion over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Wynn Resorts could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Wynn Resorts can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
We see the value of companies helping consumers, but in the case of Wynn Resorts, we’re out. Following the recent decline, the stock trades at 21.6× forward P/E (or $95.86 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are more exciting stocks to buy at the moment. We’d recommend looking at our favorite semiconductor picks and shovels play.
Stocks We Would Buy Instead of Wynn Resorts
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