HEDGEYE EDGE

Adding WYNN to the Hedgeye Best Idea Long List following a depressed but revealing Q4 earnings release.  Certainly, we’re positive on the company’s recovery prospects but the glass half full metaphor extends to more than just us being a couple of optimistic guys.  Flight to quality is not just a stock market phenomenon.  WYNN’s properties are all top shelf and should outperform when their glass is less than full.  During boom times, the well properties surely benefit from WYNN’s overflow, and grow at a higher clip.  But times are not good – hotels are more than half empty, and the recovery is early stages, yet WYNN’s properties are more than half full.  Macau and Las Vegas are on sale and so is WYNN’s stock, especially relative to regional gaming and many other consumer stocks.  Early evidence suggest consumers are opting for WYNN and so should you, in our opinion.

Q4 | THROWAWAY QUARTER BUT SUSTAINABLE TRENDS?

WYNN beat us on EBITDA in every market – Macau, Las Vegas, and Boston.  However, we’re not getting too excited about Q4 earnings generally speaking.  It’s the underlying metrics that were more revealing and important to formulate a longer duration investment thesis.  Occupancy and mass volumes in Macau, slot/table outperformance in Las Vegas, and the prospect for much higher margins in Boston.

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In Macau and Las Vegas, WYNN clearly took share in Q4, during the early stages of the recovery in both markets.  It’s our belief that the top shelf properties in most markets should outperform in a downturn and recovery, and underperform when business is booming.  Why? Well, higher quality is always preferred but decent customers get shut out when Wynn is full or too expensive but when there is availability, Wynn is the choice for more people.

MACAU | MASS[IVE] OUTPERFORMANCE

WYNN seemed to manage ADR very effectively in Q4 and it showed in occupancy rates which were much higher than we anticipated.  Unlike Q3, when they held rate – nobody was being let in to Macau anyway – WYNN focused on driving more traffic in Q4, partially through lower rates.  But let’s face it, Wynn Macau is top shelf on the peninsula and Wynn Palace dominates the quality landscape on Cotai.  These properties are where people want to stay and gamble.  And that shows in the mass numbers.  As can be seen in the charts below, WYNN gained a lot of mass share in Q4 at both Wynn Macau and Wynn Palace even though both properties played unlucky and held at a lower % than normal and last year.  These market share numbers would be a lot higher with constant hold in each period.  This corroborates our thesis of quality outperforming in the early stages of a recovery which should continue.

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LAS VEGAS | PUNTERS PREFER TOP SHELF

Similarly, Wynn Las Vegas looks like a big outperformer and market share gainer.  The hotel business is relatively more important in Las Vegas than Macau and the RevPAR dropped less than the market in Q4.  Slots and tables beat our estimate pretty handily and, of course, bested the market as well.  Wynn Las Vegas market share gains can be seen pretty clearly from the chart below, again suggesting a flight to quality.

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ENCORE BOSTON | WAIT, ISN’T THIS A REGIONAL PROPERTY?

Our perspective on Encore Boston is more focused on the cost side.  WYNN’s smallest property by far, the move from $0 EBITDA to potentially $200 million in 2022 will move the needle.  We think the company will be able to maintain a much lower cost structure than anticipated by the Street.  That means more recovery revenue flow through and higher EBITDA.  At the end of the day, this is still a regional casino.  So why aren’t analysts giving Wynn Encore at least some of the margin credit they give to the likes of PENN, BYD, CZR and other regional operators.  As the chart below shows, we’re above the Street for margins but still well below other regional gaming operators.  We recognize that Encore operates more restaurants, entertainment, and hotel rooms than the average regional property but the disparity shouldn’t be as great as the Street anticipates.

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VALUATION | ON SALE

As seen in the following chart, WYNN has underperformed during “the vaccine” recovery.  China is not letting many people into Macau – we get it – but this is just a timing issue.  We expect a quick catch up in the Macau stocks, especially WYNN, as soon as investors catch a whiff of a spigot reopening at the border.  Meanwhile, the Macau timing issue presents a buying opportunity in top shelf WYNN.  We may be viewed as glass half full guys for this stock call but until WYNN’s glass is full, the company should be the recovery share leader.

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