In the three months since my last post on Wynn Resorts (WYNN) a lot has happened. Steve Wynn has resigned as CEO and Chairman of the Board amid sexual misconduct allegations, long-time executive Matt Maddox has taken over the CEO role, two other directors of the company have vacated their positions, the board increased the annual common stock dividend by 50% (to $3.00 per share), and the company announced a settlement agreement to bring to a close a long-time litigation.
As you can see from the chart below, WYNN shares have found some support and are in the midst of climbing back, as Mr. Maddox settles into his new role and tries to turn the page:
In what turns out to be fortuitous timing, I began to trim back my WYNN positions in late January (around $195) as the stock approached my conservative $200 fair value estimate. Just days later the Steve Wynn news broke, which complicated matters with what to do with the rest of the shares.
Since then I have been sitting tight, waiting for more clarity as to the company’s next steps. Recent days has brought some insight on that front, but two big questions remain in my mind. One, how are Wynn Las Vegas bookings shaping up in the weeks since the news reports made national headlines? And two, what is the fate of the under construction Boston Harbor project?
Although I do not think the company’s Macau business will be impacted, the U.S. market is a different story. As long as Steve Wynn’s name is on the door, even if he is no longer with the company, I could see convention business contract materially, as well as tourist bookings. As far as Boston goes, it would be surprising to me if they put the Wynn name on that property when it opens in the middle of next year. So that begs the question, will they sell it, or get to keep their gaming license and simply rebrand the property?
The answers to these questions are likely to take several quarters to be crystallized. Wynn reported 2017 free cash flow of $942 million, which included roughly $650 million of construction costs for the Boston project. If the company can really generate free cash flow of $1.6 billion from its existing three properties, the stock today remains a great value ($19.3 billion equity value) and could easily fetch $230 per share (15x normalized free cash flow). And that does not even include Boston (the worst case scenario there would probably be them having to offload it at cost). Of course, that assumes that the Las Vegas business stays strong despite the negative headlines, which is a big unknown. I will be watching the data closely on that front in the coming quarters.
There has been speculation that the company may be up for sale, or that Steve Wynn might try to take it private. I think it really depends on whether he plans on holding onto his shares or not. He is 76 years old and could very well decide to retire from the business. If he was open to selling his shares I think the company would look to maximize value for shareholders and auction off the entire business to the highest bidder (and there would be plenty of interest).
If Mr. Wynn wants to hold onto the stock, then Mr. Maddox will have to figure out how to preserve the business value. That would possibly mean taking the Wynn name off of the door (if business does suffer here in the U.S.), or maybe even a more bold move (selling the U.S. assets and focusing on Macau and future growth opportunities like Japan).
In either case it looks like there are plenty of levers for the company to pull to realize full intrinsic value for the business. In that scenario, holding the stock and waiting for even more clarity will probably work out quite nicely. Heads we win (the company is sold and the resorts rebranded), tails we win (they rebrand it themselves with Steve Wynn nowhere to be seen).
Full Disclosure: Long shares of WYNN at the time of writing, but positions may change at any time