Wynn May Run Out of Luck

06/22/2009 11:11 am EST


Joseph Hargett

Financial Analyst, Schaeffer's Investment Research, Inc.

Joseph Hargett of Schaeffer’s Investment Research says shares of the casino company don’t look like they can keep up their recent winning streak.

A recent Fortune article (“Odds on Steve Wynn Beating Vegas”)  takes a look at Wynn Resorts Limited (Nasdaq: WYNN) from both bullish and bearish perspectives. Author Scott Cendrowski highlights the company's 15 straight months of falling revenue, as well as the fact that WYNN shares have more than doubled from their 52-week low, set in mid-March.

Representing the bullish case, UBS analyst Robin Farley cites two points for a recent upgrade: an improving balance sheet and gains in the Macau market. Farley notes that "Wynn has no debt due in 2009 and relatively little due in 2010."

Furthermore, the company is set to open the Encore Macau in May 2010, continuing its streak for increasing market share in the region during the past 12 months. While Las Vegas is expected to be "down significantly,” WYNN is well positioned when the market starts to turn higher, and Farley has set a price target of $50 per share.

Turning to the bearish angle, Oppenheimer's David Katz [stated] that "to bet on this stock, you need to believe that visitation will be up significantly next year." According to Katz, visitation is down for both Las Vegas and Macau in 2009, WYNN's only markets, and there are no indications that it will pick up again in 2010.

"Wynn's valuation—17x or 18x EBITDA, by our estimates—is too much of a premium to pay," [he writes]. With Vegas as a lodestone, Katz believes that the shares could fall to $27 per share. (The stock closed below $37 Friday—Editor.)

With such disparate views on Wynn Resorts' fundamental prospects, it appears to be anybody's game when it comes to betting on a decline or an advance in WYNN shares. Investors, however, appear to have sided heavily with Katz and the bears. For instance, nine of the 12 analysts following the shares rate them a Hold or worse, according to Zacks. Meanwhile, more than 18.5% of WYNN's float has been sold short.

But the sentiment backdrop is more complicated. Specifically, short interest may account for a sizable degree of WYNN's float, but this figure has plunged more than 31% during the prior month. This development should indicate a swell in buying pressure for the shares, but given the equity's 20% drop since peaking in early May, the added buyers are having little effect in stalling WYNN's reversal.

Elsewhere, options traders have shown a rising preference for calls of late, as calls bought to open have easily outpaced puts purchased [recently]. This ratio also ranks just eight percentage points shy of an annual bullish peak, underscoring the growing optimism amid the stock's recent bout of technical weakness.

The stock's failure to overcome the round-number $50 level and its falling ten-month moving average should raise a warning flag for bullish WYNN investors. The fact that this pull back occurred amid heavy short covering should also raise more than a few eyebrows.

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