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Morningstar | Wynn's Ongoing Development Supports Its Intact Brand Intangible Asset Advantage; Shares Attractive

In our view, the main takeaway from Wynn’s July 10 investor day was that the company is set to continue to make sound investments across its Macau and Vegas portfolio, supporting its intact brand intangible advantage (source of its narrow moat). We don’t plan a material change to our $164 fair value estimate for Wynn, which incorporates roughly 5% and 19% average annual sales growth and operating margins (versus 17.8% reported in 2018), respectively, through 2023. We see shares as attractive with free cash flow inflecting in 2020, as Wynn benefits from the completion of recent investments.

Given our long-held constructive view on the Macau gaming market, we are encouraged that Wynn is moving forward with plans to expand its Palace resort with the opening of a new luxury facility in 2025 called Crystal, which we now plan to incorporate into our model. Phase one of Crystal includes 670 suites (adding to Palace’s current 1,700 count), costing $2 billion to construct. We think it is reasonable to expect ROIC around 20% starting by 2028, given the low-20% return Wynn Palace achieved in 2018 (its second full year of operation).

We are also favorable on Wynn’s new Vegas convention center that opens in early 2020, as we believe it can lift occupancy in the company’s hotels around 5 percentage points (from the 87.5% level reached in 2018), resulting in a midteens ROIC for the surrounding properties in 2022. Also, Wynn’s recently opened Boston property (10% of estimated 2020 total EBITDA) provides near-term sales growth, as we see the resort garnering around 30% gaming share of a $2.6 billion market.

While recent investments have capped free cash flow as a percent of sales at 1% on average the past three years, Wynn is set to leverage this spend with the free cash flow metric reaching a high-teens level in 2020. We continue to expect capital allocation to focus on a combination of dividends, share buybacks, and debt reduction, which we view as prudent.

Wynn provided 2021 guidance that was near our EBITDA forecasts but above our revenue estimate, as we see near-term cyclical headwinds. The company targets 2021 EBITDA of $2.417 billion versus our $2.396 billion forecast (which we don’t see changing materially), aided by past and upcoming Macau and Las Vegas investments. That said, Wynn expects $8.1 billion in 2021 revenue versus our $7.64 billion estimate (which we don’t expect to meaningfully alter). Here the company expects Vegas market gaming revenue growth to average 2% through 2021, which we view as aggressive given the relatively flat growth averaged over the past five years. As a result, we don’t plan much change to our flat organic revenue growth for Wynn Vegas properties through 2021, although new convention and room development will allow the company to post around a 2% average annual sales lift in the region over that time. We also see Wynn’s guidance for 3.5% average Macau market gaming growth through 2021 as aggressive, given near-term cyclical and geopolitical concerns. Therefore, we don’t expect to alter our market forecast that calls for negative low-single-digit growth in 2019, followed with a rebound to low-single-digit and mid-single-digit lifts in 2020 and 2021, respectively.