Why Wynn, MGM Resorts Are Trading Higher Today. The global pandemic has been devastating to casino stocks in 2020, but optimism surrounding a COVID-19 vaccine has lifted a number of casino stocks on Thursday.Casino shares are trading higher potentially amid the beginning of vaccine rollouts, which could help casinos and other hotel and leisure companies regain demand.MGM Resorts International. Find real-time WYNN - Wynn Resorts Ltd stock quotes, company profile, news and forecasts from CNN Business.

Updated on September 14th, 2020 by Bob Ciura

2019 odessa poker run game. As the saying goes, the house always wins. Casinos operate strong business models, as casinos earn a virtually guaranteed profit from the sum of the bets they receive. The relatively attractive economics of casinos make the industry worthy of a closer look.

Investors may be particularly intrigued by the earnings growth and dividends of the major casino stocks. The 4 major publicly-traded casino stocks all pay dividends to shareholders, but they are far from the safest dividend stocks around.

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Casinos are not without a fair amount of risk. Casinos are highly vulnerable to recessions, as consumers typically cut back heavily on gaming when the economy enters a downturn. The four major casino stocks saw their earnings collapse during the Great Recession. A similar impact has taken place to start 2020 due to the coronavirus crisis, which has battered the casino industry.

We have analyzed the major casino stocks in the Sure Analysis Research Database, which ranks stocks based upon the combination of their dividend yield, earnings-per-share growth potential and valuation to compute expected total returns. In this article, we will compare the expected 5-year total annual returns of the four major casino stocks.

For this article, stocks are ranked in order of least attractive to most attractive. While 5-year expected returns are incorporated in the rankings, we have also utilized a qualitative screen based on balance sheet strength and overall business quality.

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Casino Industry Overview

The casino industry is in severe distress right now. The spreading coronavirus and resulting global recession have taken their toll on the casino stocks. The large U.S. casinos are heavily reliant on Macau, the largest gaming market in the world and the only market in China where casinos are legal. As a result, these stocks are very sensitive to any developments that affect the gaming activity in Macau.

This was a significant concern several years ago. In 2014, China initiated an anti-corruption regulatory crackdown, which greatly reduced the gaming activity in the area. Fortunately for the casinos, the downturn lasted for approximately two years and gaming activity in Macau recovered thereafter. Then the gaming activity in Macau faced another headwind, namely the trade war between the U.S. and China.

This headwind lasted for only about a year but now Macau is facing its strongest challenge ever, the outbreak of coronavirus, which has caused a huge hit in the gaming business. Casinos were shut down for an extended period due to the coronavirus. Visa restrictions have also added to the decline in gaming activity in Macau.

As a result, gross gaming revenue in Macau plunged 94.5% in August, compared with the same month last year. Gross gaming revenue in Macau declined 81.6% through the first eight months of 2020. The high sensitivity of casino stocks to all the developments related to China and their pronounced cyclicality means that investors should pick casino stocks carefully.

Top Casino Stock #4: Wynn Resorts (WYNN)

Wynn Resorts owns and operates Wynn Macau and the Wynn Palace in Macau, as well as Wynn Las Vegas and Encore in Las Vegas. Since Wynn Resorts is highly leveraged to the gaming activity in Macau, it saw its earnings collapse and it cut its dividend by 62% in 2015-2016 due to the Macau downturn that was caused by the anti-corruption regulatory crackdown in the area. But as Macau strongly recovered in the last three years, Wynn Resorts returned to growth.

Unfortunately, the company is now facing the headwind of coronavirus in all the regions in which it operates. Wynn Resorts reported earnings results for the second quarter on 8/4/2020. Revenue declined 95% year-over-year to $85.7 million, which was $190 million less than expected. The company lost $6.14 per share in the quarter, missing estimates by $1.23. Adjusted property EBITDA was a loss of $322.9 million compared to estimates of a loss of $314 million. This compared unfavorably to adjusted EBITDA of $480.6 million in the second quarter of 2019.

Results for Wynn Resorts were once again severely impacted by the COVID-19 pandemic as properties in Macau were closed for 15 days. Las Vegas operations didn’t open until June 4th.Wynn Palace revenues declined 98.6% as a result. Revenues for Wynn Macau decreased 97.8% while Las Vegas decreased 86% year-over-year. Wynn Resorts suspended its dividend in an effort to conserve capital. Consensus estimates call for a loss of $11.52 per share for 2020.

On the bright side, casinos are gradually reopening, and Wynn Resorts seems to have ample room to grow in the upcoming years thanks to its promising growth pipeline.

Source: Investor Presentation

The company has made progress in the design of Crystal Pavilion in Macau, which will be a major tourist attraction. In addition, Encore Boston Harbor opened in June-2019 and has exhibited strong performance so far so it has promising growth prospects ahead thanks to expected ramp-up in activity.

Moreover, the company has been caught off guard, with total current and long-term debt outstanding of $12.78 billion and cash and cash equivalents of $3.80 billion. Therefore, the stock is carrying an increased amount of risk right now due to its high level of debt.

However, we believe that the coronavirus crisis will not last beyond this year and we view the long-term growth prospects of the company as intact. We expect 4% annual EPS growth through 2025. Using the company’s current assets, return on assets of 5.6% over the last decade and share count, we believe Wynn Resorts has earnings power of $1.89. We will use this figure to calculate fair value and projected return.

Based off of the earnings power estimate for 2020, the stock is currently trading at a P/E ratio of 44, which is higher than its historical average of 30.1. However, the stock traded at abnormally high P/E ratios in some years due to depressed earnings in those years.

For instance, the abnormally rich valuation of the stock during 2015-2017 resulted from the market’s view that the downturn in Macau was temporary. Our target P/E ratio of 18 reflects uncertainty regarding Macau and the coronavirus. If shares reverted to our target P/E by 2025, then valuation would be a 16% headwind to annual returns over this time period.

If the stock reaches our fair valuation level over the next five years, it would reduce shareholder returns by 16%, effectively wiping out earnings growth and dividends over that time period. The stock is markedly volatile due to its high debt load, which is an added risk factor.

As a result, only those who can stomach extreme stock price volatility and have confidence in the ability of Wynn Resorts to navigate through the current crisis should consider buying the stock.

Top Casino Stock #3: MGM Resorts (MGM)

MGM Resorts owns and operates casinos, hotels and conference halls in the U.S. and China. The company has the least exposure to Macau in this group of stocks. As a result, it suffered much less than its peers from the trade war between the U.S. and China and the protests of people in Macau a few months ago.

However, the company is highly exposed to the outbreak of coronavirus, just like its peers. Due to the rapid spread of the coronavirus, MGM Resorts suspended all its casino operations in Las Vegas on March 16th and did not accept hotel reservations for the dates prior to May 1st. The company also closed its casino in Maryl

Table Of Contents

Casino Industry Overview

Top Casino Stock #4: Wynn Resorts (WYNN)

Top Casino Stock #3: MGM Resorts (MGM)

Encore Casino Stock