Since I first wrote about gaming and hospitality company Wynn Resorts (WYNN) three and a half years ago the stock performance has been nothing short of an intense roller coaster. For a large cap company with a relatively simple business, you are unlikely to see more volatility in the equity markets. Such wide gyrations are great for investors, especially those willing to be contrarian and buy when things look the bleakest, but the exercise can admittedly become tiring while also predictable.
Fast forward from May 2015 to today and I am still a rider on this roller coaster. Although I bought stock at low prices and sold much of it at high prices, I failed to sell everything near the top and we are now stuck in a down cycle for the shares, despite the fact that the company is doing just fine.
Below is a five-year chart of Wynn Resorts shares that shows just how dizzying the ride has been:
I was buying the stock in 2015 after the prodigious collapse from the 2014 highs and began trimming positions in late 2017 and well into 2018, but the long-term outlook (still very bright in my view) caused me to hold onto to a smaller position even as the stock reached the $200 level. And now we are left with an interesting question; what to do now?
Given the stock chart above, you would probably guess that Wynn’s business is in trouble, but you would be wrong. In fact, company EBITDA this year is likely to come in right around their previous best two years ($1.68 billion in 2013 and $1.61 billion in 2017) and could even reach $1.7 billion, a new company record. As is usually the case, the financial markets extrapolate current results and value the business based on those near-term figures, ignoring both longer term historical track records and the future outlook a year or two down the road.
That trend is playing out now, as Wynn’s business has gotten soft in recent months and is unlikely to bounce back quickly in the near term. Never mind that their Boston property will open in June 2019 and offset weakness seen elsewhere in their property portfolio. Never mind that the company is in the process of designing new additions to their properties in both Las Vegas and Macau that will grow profits over time.
What happens when near-term stock valuations are based mostly on near-term financial results is that prices and investor reactions overshoot in both directions. When things are great, the stock reflects that and analysts have high estimates for future profits and use high valuation metrics due to those rosy outlooks. The opposite is seen as well. This week, as near-term profit expectations come down for WYNN, the multiples used to determine Wall Street price targets will also come down, undoubtedly justified in their minds “to reflect the near-term weakness of the business.”
From a valuation perspective, the value of a dollar of profit should not change based on near-term trends. The notion that WYNN should be valued at 15x EBITDA one quarter and 12x the next makes little sense, if indeed we believe that the stock should reflect the discounted present value of all future profits in perpetuity.
To illustrate this phenomenon, let’s look at Wynn’s stock price and financial results since 2013. The 2018 revenue and EBITDA figures shown are my firm’s internal estimates.
As you can see, the stock price reacts far more violently, in both directions, than the actual financial results of the business. In each and every year, the stock move is more aggressive than the year-over-year (yoy) change in sales and profit. Interestingly, the stock today is 50% below the level of year-end 2013, even though EBITDA is roughly the same.
Generally speaking, this is why it makes sense to many of us in the industry to have a portion of one’s investment portfolio allocated to active managers; to try and take advantage of such mispricings in an inefficient marketplace.
In hindsight, it would have been nice to sell every share earlier this year and buy back each of those shares today. In actually, I am quite pleased that I bought it low and sold a portion when I did. While the roller coaster ride that is Wynn Resorts stock can be frustrating at times, there is no reason to jump off now. If my investment thesis is right (the Boston property does well and the legacy resorts in Las Vegas and Macau grow revenue and profits over the long term, despite short-term bumps along the way) then investors will surely get another chance to sell at a fair price in the future, just as they get chances to buy at attractive prices periodically.
Full Disclosure: Long shares of WYNN at the time of writing, but positions may change at any time