Some of this might be hard to read if you are on dark view but thems the breaks. Cramer's take on WYNN. They break down the % of EBITDA coming form MACAO and play with various scenarios.
TLDR - Cramer believes it is oversold at $85 a share and is holding it.
Analyzing Wynn Resorts Through a SOTP Lens
By Jim Cramer and the AAP Team | Sep 15, 2021 1:13 PM EDT
Analysis:
WYNN DKNG
With Wynn Resorts (
WYNN) being pummeled for the second day in a row by fears of stricter regulations in Macau, something we spoke to in more detail in our alert yesterday
here, we want to take a step back and examine what the stock is worth in today's dollars by parsing the business into separate pieces. One great way to do this is to perform a sum-of-the-parts, or SOTP, analysis.
Such an analysis is a valuation methodology used to calculate the worth of a multioperation with varying growth prospects and margins. In a SOTP analysis, we can break a business down into its various operating segments/revenue streams, value each one individually, apply an appropriate multiple based on durability (i.e., resilience against competition) and growth, and lastly, add up the parts to determine the value of the whole.
To be clear, while we are breaking the company up for valuation purposes, we are not saying a breakup is required for value to be created. Instead, we believe this type of analysis that shows how much the different parts of a company are worth relative to the current market price will help club members deal with an emotional position unemotionally.
Given that the pressure can largely be attributed to one operating region, we felt the best way to think about this would be a "Sum of the Parts" (SOTP) analysis, as this will allow us to isolate the problem area and conduct some scenario analysis.
In order to provide some insight into how the market was valuing shares prior to the news out of Macau, we looked to a SOTP analysis published by the analysts over at Citigroup on August 5, 2021, and used this as our base case - the base case being the various metrics used to value the name prior to this announcement. The main metrics we are considering are the EBITDA margin (which we can then apply to the current consensus sales expectations) and the multiple applied to EBITDA (which yields an asset value).
First, here is what Citigroup originally published:
While not explicitly stated in the model above, we can determine from the figures provided that "Wynn Macau" had an implied EBITDA multiple of roughly 9.3x ($9,094.4 asset value ÷ $977.9 EBITDA = ~9.3)
Next step was to simply get these numbers into an excel spreadsheet so that we could start to perform some scenario analysis. As you can see below, similar model and the numbers largely match up (any difference can be attributed to rounding errors), we simply added in our assumed Macau EBITDA multiple.
Next, we tweaked the Macau estimates to reflect the current consensus. We must be sure that our estimates in this problem region that has been one step forward, one step back were as up to date as possible.
As we can see below, based on these new assumptions, the analysts are also assuming that the region's EBITDA margin contracts 490bps (from the 29.4% noted above to 24.5% indicated below). If we leave all other assumptions equal, the implied target price declines from ~$140 to $120 per share.
However, shares are clearly trading well below that implied target price, so, our now question becomes, well what exactly is the market attempting to price in at these levels - i.e., what scenario yields a share price of $85 per share? How much downside is being priced in?
Once we determine that the only question left to answer is whether or not we believe that scenario that has gotten us to this point is in fact what we believe will be the case a year from now. If it is, we may need to rethink this position, if it's not then we are looking at an opportunity as the sentiment has simply become far too negative on this name.
To help determine the current expectations - those implied by the share today's share price, not analyst models (i.e., the buy-side, not the sell-side) we ran some scenario analysis.
First, we took the current revenue estimate (leaving the implied EBITDA margin unhanged) and adjusted the figure in 20 percentage point increments (the difference here $730.59 revenues versus the $731 figure above can again be attributed to rounding on the margin front):
Now we have some numbers to work with assuming a no impact or a 20, 40 or 60 percentage point hit to revenues.
The next step was to start playing with the EBITDA margin - this will help to factor in additional costs to comply with potential regulations or if the government mandates a percentage of profits be shared with other industries. As can be seen below, we ran the analysis assuming a 450bps, 950 bps, 1450bps contraction to EBITDA margins. These are all meaningful declines.
