Wynn Resorts Coming Up Aces For Investors

It has been about 18 months since Steve Wynn purchased more than 1 million shares of his own company’s stock, Wynn Resorts (WYNN), at prices in the low to mid 60’s. While he had better timing than I did (I initially started buying earlier in 2015 at higher prices), which would be expected, his insider purchase has been immensely profitable.

WYNN shares surged this week after the company reported strong earnings, breaking through the $125 level for the first time in more than two years. Bargains hunters like me who bought at multiple times on the way down have had to be patient, but buying great companies at discounted prices often works out very well for those who are willing to wait.

Now that Wynn’s second Macau resort has opened (last August) and is ramping up nicely, I thought it was a good time to revisit the investment. My thesis since 2015 has been that with the addition of two more resorts (the aforementioned Wynn Palace and the forthcoming Wynn Boston, set to open in mid 2019), WYNN’s free cash flow would move materially higher and justify a stock price of at least $150 per share (a relatively conservative 15x multiple on $1 billion of annual free cash flow).

Wynn’s recent results do nothing to shake my confidence in that investment thesis. In fact, it may very well turn out to be too conservative. Based on recent numbers for the company’s Macau properties, it is entirely possible that WYNN could be looking at reaching that cash flow goal before their Boston property opens.

Considering that the company could reasonably expect a 10-15% return on both its $2.4 billion investment in Boston, as well as the recently announced Las Vegas expansion (a golf course that earns $3 million of profit per year is being replaced by a $500 million development project that could earn $50-$75M per year), there appears to be nice upside potential to my price objective. For instance, an incremental $350 million of EBITDA at a 12x multiple would equate to $4.2 billion of added value, compared with estimated construction costs of just $2.9 billion. Tacking on $1.3 billion to Wynn’s valuation would equate to roughly $13 per share, making a stock price of over $160 distinctly possible by 2019.

As an investment manager position sizing is always a consideration, but that aside, I remain intrigued by Wynn stock even after its recent rise. As they say at the tables, I am likely going to “let it ride” for quite a while longer.

Full Disclosure: Long shares of Wynn Resorts at the time of writing, but positions may change at any time.

CEO Steve Wynn’s Huge Purchase Reinforces That Wynn Resorts Stock Is Dramatically Undervalued

Wynn Resorts (WYNN) announced on Tuesday evening that its Founder, Chairman, and CEO Steve Wynn purchased more than 1 million shares of stock on the open market between December 4th and 8th, bring his total ownership to more than 11 million shares (about 11% of the company). The stock reacted well today to the news, rising $8 to around $70 per share.

I posted earlier this year about my belief that shares of WYNN are very undervalued. After peaking at $249 in March 2014, I began to get interested below $110 in the spring and have been averaging down my clients’ average cost basis during the stock’s swoon.  Wynn’s purchases this month took place when the stock traded between $60 and $66. This insider buy is interesting on multiple fronts. Let me touch on some that come to mind.

1. Owner-operators like Wynn typically sell their shares over time

Founders who continue to run their companies often have large equity stakes. In most instances these folks will sell shares steadily over time for diversification purposes. What makes this transaction so notable is that Wynn already owned 10% of the company (worth nearly three-quarters of a billion dollars) and yet he still bought more stock. This is rare. Think of the times we have heard about the likes of Bill Gates, Mark Zuckerberg, or Jeff Bezos trade in their company’s stock. They almost always sell.

2. Most insider buys are small

Although it doesn’t happen as much as one might hope, when CEOs buy shares in their own company (in the open market with their own cash, not via exercising stock options) the buys are typically relatively small compared with their actual compensation. These kinds of trades are seen by many investors as merely token purchases made for the sake of optics (as opposed to a large financial bet). If a CEO who makes $5 million per year buys $500,000 or $1 million worth of stock once every 5 or 10 years, that hardly signals to investors that they really think it’s a great investment. Wynn’s purchase of 1 million shares is unusual in this respect as well. He spent more than $60 million of his personal funds. That is a lot of money (even for Wynn, who is much wealthier than the average CEO). Think about all of the things he could have bought with $60 million. While it is clear speculation on my part, I think Wynn actually made this move with financial motivations first and foremost.

3. What does this move say about the intrinsic value of WYNN stock?

So why did Wynn buy stock now? After such a huge drop (75% from the peak less than two years ago), should we assume he didn’t think it was undervalued until now? Why not buy at $150 or $100? Did he think the shares were fully valued at $75 or $80? Again, this is pure speculation, but if you buy into my argument that he already has plenty of shares, even if he wanted to signal a vote of confidence he could have done so with a far smaller buy (even $5 million would have been far more than most every other CEO purchase). I would guess that Wynn made this particular move because he thinks the stock’s decline had simply reached “ridiculous” territory. If he is making this investment simply to make money, and he thinks the stock price now is irrational, then why not make a big bet on that view? Conversely, if he was simply trying to stem the stock’s decline with a headline, why not do so after the stock fell by $100 per share? What about after it fell by $150? Instead he waited until it dropped by nearly $200 per share. Why? My guess: because it’s just too darn cheap to ignore, even when you already own 10 million shares.

4. How does my view of the stock change with this news?

It doesn’t. I thought the stock was materially mispriced the day before the news hit and I feel the same way the day of the announcement. Will I load up on even more shares now that Wynn is buying? Probably not anymore than I would have already. While his confidence is a positive signal, it’s pretty hard to objectively argue that the stock has not been undervalued for quite some time. The fact that Steve Wynn likely has the same opinion should not come as a surprise.

5. Should investors jump in now, based on this news?

Wynn stock popped 13% on this news, probably mostly due to short covering. In most instances moves like that are short-lived, either because the news is forgotten in a matter of days, or because the next material news item for the company will likely be deemed more important. I would guess that the stock gives up much, if not all, of this pop over the coming days and/or weeks. After all, the next big catalyst for the stock is the opening of the new $4.1 billion Wynn Palace property on the Cotai strip, which has been pushed back from the end of Q1 2016 to the end of Q2 2016. Until then, the same concerns that have plagued the stock for the last year (the huge slowdown in Macau gaming revenue) are unlikely to abate.

Full Disclosure: Long shares of WYNN at the time of writing, but positions may change at any time

Wynn Resorts Down More Than 50% Is A Long-Term Opportunity

The holy grail for contrarian, value investors is buying great companies at bargain prices, typically during a time when they have hit a short-term speed bump. While this is not an everyday occurrence, and it is even more rare when equity markets are elevated as they are today, you can find great investments in any market environment if you pay close attention.

Last week I initiated a new position in Wynn Resorts (WYNN), a leading gaming and resort operator with a pair of properties in Las Vegas and Macau, with two new properties in development (a second resort in Macau and one outside Boston). I paid $108 and change for the initial group of shares, which represented a more than 50% decline from the stock’s 52-week high of $222. In fact, WYNN shares actually traded at $108 for the first time way back in early 2007.

I bought on a day when the stock was trading down more than 20 points after a disappointing earnings report. In addition, the company cut their dividend to conserve cash and fund the construction of their new resorts, each of which will cost billions of dollars. Wynn’s recent struggles are due to weakness in the Macau gaming market, as China has recently enacted policy restrictions which have hampered both visitor traffic and spend over the last year.

While these issues were well-known to investors, the dividend cut came as a surprise (the annual payout was reduced from $6 to $2 per share). There were many investors who were in the stock for the income and wanted out, as the dividend yield has gone from over 4.5% to less than 2.0%. I like to pay close attention to dividend cuts because they often result in dramatic stock price declines, even though not every company cuts their dividend for the same reason. In addition, company valuations are not impacted by changes in dividends, but rather changes in actual earnings. Oftentimes the two are not directly related (e.g. the dividend cut is more dramatic than the earnings decline).

In Wynn’s case, which is different from many instances where companies have seen their profitability evaporate and therefore are unable to continue paying a dividend out of free cash flow, the company is merely preserving cash now that sales levels are lower in Macau and they no longer have excess free cash flow above and beyond what they need to build out their new properties. The company remains very profitable. As a result, it is entirely reasonable to expect that once Wynn’s new projects open, their absolute profit dollars will increase while their required capital expenditures decline, which will support an increase in the dividend.

We see this a lot with growth companies who are in highly capital-intensive businesses. As capital needs fluctuate, the dividend is adjusted both up and down based on where they are in their growth cycle. While this does not match up with most dividend-paying companies, which pride themselves on maintaining their dividends no matter what (including steady and predictable annual increases), a company like Wynn really uses them as a way to pay out excess cash that they don’t need to build new or expand existing properties. In fact, the company also uses one-time special dividends to accomplish the same objective.

Lastly, I think it is important to note that one future positive catalyst for Wynn will be a leveling off and eventual rebound in their Macau financial results. The Chinese government is not going to suppress gaming their forever. At some point, given the popularity of the area, we will see growth in Macau again, especially considering how much of a drop there has been in recent quarters. I am not going to pretend I know when exactly that inflection point will occur, but that is one of the perks of being a long-term investor; I am willing to be patient.

To sum up, I believe a price of $108+ represented an excellent value for a great company like Wynn. That does not mean that the stock will not drop further in the short-term (I am not trying to pick the bottom here, just a good entry point for the long-term), but I think the stock will be materially higher several years from now. If true, we will look back and say that 2015 was an excellent contrarian buying opportunity.

What do you think?

Full Disclosure: Long shares of WYNN at the time of writing, but positions may change at any time.

Investors in Biglari Holdings Now Getting Core Steak ‘n Shake Business for Free

It has been a while since I last wrote about Biglari Holdings (BH) and their efforts to diversify into a holding company far bigger than just the core Steak ‘n Shake restaurant operations. BH has acquired a 20% stake in Cracker Barrel (CBRL), as well as purchased Maxim magazine, First Guard Insurance, and Western Sizzlin outright. Accounting for a recently completed rights offering that raised $86 million, BH has around $200 million of cash and no holding company debt (the Steak ‘n Shake subsidiary does have debt of $220 million). An update seems in order now that BH shares are trading for $330 each, for an equity market value of $680 million.

Why? Well, the valuation seems off, to put it mildly. At the current quote of $103 per share, BH’s Cracker Barrel stake is worth $488 million. Add in a net cash position of approximately $200 million and you quickly realize that buyers of BH today are getting Steak ‘n Shake (a business with more than $700 million of annual sales) for free, as well as all of the company’s other assets. To give you an idea of how ridiculous this is, consider that the Steak ‘n Shake generated annual free cash flow of $60 million in 2010 and 2011 (that figure has come down in recent years as CEO Sardar Biglari has invested a lot of capital into accelerating Steak ‘n Shake’s franchising business globally). As such, it is not a stretch to value Steak ‘n Shake equity at multiple hundreds of millions of dollars (accounting for its debt load). Getting that business for free is a big deal on a percentage basis considering that BH’s total equity capitalization is currently valued at less than $700 million by the market.

I am not the only investor who sees value in BH shares. Och-Ziff Capital Management (OZM) recently filed a 13G disclosing an 8% passive stake in the company, and that filing was made when the stock was trading over $400 per share. It will be interesting to see if they increase their stake at current prices. Accordingly, you may not be surprised to learn that BH is currently my largest equity holding.

Full Disclosure: Long shares of BH at the time of writing, but positions may change at any time.

Biglari Holdings Buys Maxim Magazine In Distressed Sale

There was a time when Steak ‘n Shake and Maxim magazine would have first brought to mind my college days, but oh my how things have changed. Now one of my largest investments, Biglari Holdings ($BH), owns both companies. Activist investor Sardar Biglari recently announced that the holding company he runs has acquired Maxim magazine from Alpha Media Holdings in a distressed sale. The purchase price was not disclosed, but media reports suggest a cost between $10 and $15 million. That is a far cry from the near-$30 million deal with another buyer that fell through late last year. Always a seeker of a bargain, Biglari appears to have picked up a solid brand on the cheap. The magazine, despite millions of readers and tens of millions in advertising revenue, has been losing several million dollars annually in recent years, so there is work to be done for this investment to pay off.

At first glance it may seem quite odd that the owner of Steak ‘n Shake, as well as a 20% stake in publicly traded Cracker Barrel (CBRL), would venture into the media business, but Biglari has made it known for years now that he aims to build a diversified holding company and will not shy away from entering any industry that offers the potential for significant profits. While he had hinted that an insurance company was on his shopping list, this deal should not surprise (or worry) close watchers of Biglari Holdings.

While success with Maxim under the Biglari umbrella is hardly assured, when you pay such a low price for an asset with a large readership and a strong brand among its core young man demographic, there are multiple levers you can pull to create value from the transaction. Biglari has shown he prefers strong brands (something both Steak ‘n Shake and Cracker Barrel possess) and there is no doubt that the Maxim name could find itself attached to far more than just a magazine cover over the next several years. Licensing opportunities could very well be a core part of Biglari’s future plans for Maxim. The recently launched Esquire Network cable television station is a good example of how media brands can be extended in order to broaden their reach and appeal.

If we assume Biglari paid approximately $12 million for Maxim, it is not hard to see how reasonable it is to expect that it could pay off in spades. If the company five years from now earned free cash flow of just $5 million per year, it would be a hugely successful investment that could be sold for many multiples of original purchase price, or Biglari could hold onto it long term and use the cash flow to fund additional acquisitions. As part of a larger comapny with more financial backing, it is likely that meaningful investments will be made into the Maxim brand, which could make that scenario a reality far easier than would have been possible within a struggling media company.

While some may be scratching their heads as to why Biglari made this deal, I believe it fits the exact mold that Sardar has been describing since he became CEO. As a result, I think the odds of success are likely far greater than casual onlookers may believe, and for that reason I remain as bullish on the company’s long-term prospects (and the stock) as I was before the acquisition was announced.

Full Disclosure: Long shares of Biglari Holdings at the time of writing, but positions may change at any time

Netflix Management: Our Stock Is Overvalued

It won’t get much attention since Netflix (NFLX) stock has been on fire this year and investors today are loving the company’s third quarter earnings report released last night, but Netflix’s CEO and CFO have actually come out and publicly warned investors that the stock price performance in 2013 (started the year at $92, opened today’s session at $388) is likely overdone to the upside. In their quarterly letter to investors published yesterday this is what they wrote:

“In calendar year 2003 we were the highest performing stock on Nasdaq. We had solid results compounded by momentum-investor-fueled euphoria. Some of the euphoria today feels like 2003.”

Let’s see what they are referring to. As you can see below, Netflix stock went from $5 to $30 in 2003:

NFLX-2003

And then in 2004 it peaked at $40 and fell all the way down to $10:

NFLX-2004

Netflix started 2013 at $92 and opened today’s trading session at $388:

NFLX-2013

 

In this case the company is executing very well but the stock price does not really make any sense. Shareholders beware.

UPDATE (11:55am ET): Netflix is currently trading at $328, down $60 per share from its opening price this morning. Maybe the company has actually called the top in its stock for now. Interesting.

Full Disclosure: No position in NFLX at the time of writing, but positions may change at any time.

Can AMC Networks Keep Up Its Winning Streak After Breaking Bad and Mad Men End?

AMC Networks (AMCX), the company formerly known as Rainbow Media that was split off from Cablevision in 2011, has been the epitome of a successful public market spin-off. Huge hits led by Breaking Bad and Mad Men have the company, which owns four national channels (Sundance Channel, IFC, and WE tv, in addition to the flagship AMC), on a roll with both viewers and investors. As you can see from the chart below, the stock has doubled in the two years since the shares made their stock market debut as an independent company.

AMCX

 

Bulls may want to consider taking some of their chips off the table. The final eight episodes of Breaking Bad premiere on August 11th and Mad Men‘s seventh and final season will air in 2014. After AMC’s two biggest hits, which essentially put AMC on the map after it shifted its prime-time strategy to original series (the channel used to be called American Movie Classics), come to an end the company’s executives will have large shoes to fill and a lot of pressure to do so. In fact, news that Breaking Bad creator Vince Gilligan is in talks about a spin-off show (sans main characters) is interesting because although spin-offs of popular shows are always intriguing from a networking exec’s perspective (case in point: Major Crimes debuted sans Kyra Sedgwick following the end of The Closer on TNT), they do not have good long-term track record (ask some of the Friends stars, for instance).

As a big fan of both Breaking Bad and Mad Men, I hope AMC can keep its winning streak alive. However, we know that television network ratings are cyclical and the bar is going to be set extremely high after Mad Men ends next year. With the stock up so much over the last two years, investors should understand that few networks have multi-year runs without hiccups, especially when they have to plug gaps in their show lineups after big hits come to an end.

Full Disclosure: No position in AMCX at the time of writing, but positions may change at any time.

Netflix and Tesla: Early Signs of Froth in a Bull Market

It is quite common for a bull market to last far longer than many would have thought, and even more so after the brutal economic downturn we had in 2008-2009. Only just recently did U.S. stocks surpass the previous market top reached in 2007. Although it does not mean that a correction is definitely imminent, the current stock market rally is the longest the U.S. has ever seen without a 5% correction. Ever. Dig deeper and we can begin to see some froth in many high-flying market darlings. Fortunately, we are not anywhere near the bubble conditions of the late 1990’s, when companies would see their share prices double within days just by announcing that they were launching an e-commerce web site. However, some of these charts have really taken off in recent weeks and I think it is worth mentioning, as U.S. stocks are getting quite overbought. Here are some examples:

TESLA MOTORS – TSLA – $30 to $90 in 4 months:

tsla

NETFLIX – NFLX – $50 to $250 in 8 months:

nflx

GOOGLE – GOOG – $550 to $920 in 10 months:

goog

 

You can even find some overly bullish trading activity in slow-growing, boring companies that do not have “new economy” secular trends at their backs, or those that were left for dead not too long ago:

BEST BUY – BBY – $12 to $27 in 4 months:

clx

CLOROX – CLX – $67 to $90 in 1 year:

clx
WALGREEN – WAG – $32 to $50 in 6 months:

wag

 

Ladies and gentlemen, we have bull market lift-off. My advice would be to pay extra-close attention to valuation in stocks you are buying and/or holding at this point in the cycle. While the P/E ratio for the broad market (16x) is not excessive (it peaked at 18x at the top of the housing/credit bubble in 2007), we are only 15-20% away from those kinds of levels. Food for thought. I remain unalarmed, but definitely cautious to some degree nonetheless, and a few more months of continued market action like this may change my mind.

Full Disclosure: No positions in any of the stocks shown in the charts above, but positions may change at any time

The Most Entertaining CNBC Segment Ever: Ackman vs Icahn

Yeah, I don’t think they like each other. It’s rare that two hedge fund titans are on the opposite side of such a controversial trade (Herbalife HLF) and in this case the result is an on-air feud. If you have any interest or follow Ackman, Icahn, Herbalife, and/or activist hedge funds, you might find this as entertaining as I, and many others in the industry, did on Friday when this altercation unfolded live on CNBC.

ackmanphoto

CNBC: Ackman vs Icahn 01/25/13 (27 min 39 sec)

Netflix Stock Repricing Overdone

Netflix (NFLX) stock is soaring this morning, up 36% ($37) to $140 per share in pre-market trading. The company’s fourth quarter financial results were above expectations, but at first glance do not appear to warrant a 36% stock price increase. Revenue rose 7.9% year-over-year, leading to a very small quarterly profit of 13 cents per share.

Investors are enthusiastic about Netflix’s addition of 2.05 million domestic streaming customers (up 8.2% versus the prior quarter), but that figure is a bit misleading as actual paid customers rose by just 1.67 million (+7.0%). Obviously, lots of free trial memberships are given out at the holidays, but how many of them convert to paying customers is a big question mark.

It was also a good sign to see operating earnings from the domestic streaming segment rise to $109 million in Q4, versus just $52 million a year ago. The DVD mail segment earned $128 million domestically for the quarter, which just goes to show you how much more profitable those subscribers are. The DVD mail business earned more money, despite having just 8.05 million paid subs, versus 25.5 million paid streaming subs.

Netflix continues to see subscriber losses in its most profitable segment and gains in a streaming business that has very high operating costs. Just how valuable a streaming customer actually is will remain an important issue for investors. Based on the stock’s rise this morning, you would think streaming customers mint money for the company. Conversely, Netflix reported segment profits of $4.25 per paid subscriber during the fourth quarter. That comes out to less than $1.50 per month in profit from the $8.00 per month in revenue they generate.

Back in August, with the stock floundering in the mid 50’s, I wrote an article on Seeking Alpha entitled “Netflix Is Finally Cheap.” I did not buy the stock, which in hindsight was a mistake since the analysis was correct. With the stock around $140 as I write this post, I can not justify an equity valuation of $8.25 billion for the company, so if you have played this stock correctly lately, you might want to strongly consider lightening up on your long position into today’s strength.

Full Disclosure: No position in NFLX at the time of writing, but positions may change at any time