The World Reopening Won't Be Enough for This Casino Operator to Recover

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I got a chance to do some teaching in Boston recently...

I was in town in Cambridge, Massachusetts, teaching two classes at Hult University. It's a well-regarded international business school with campuses across the globe.

As of May 29, Massachusetts removed just about all of its restrictions thanks to low coronavirus case counts and high vaccination rates. That included fully opening the TD Garden arena for the Bruins and Celtics playoff games, as well as Fenway Park opening to capacity for the weekend Red Sox series against the Miami Marlins.

While I was in town, I used the reopening as an excuse to check out Wynn Resorts' (WYNN) Encore resort and casino in Boston Harbor...

Although it has a smaller footprint than its cousins in Macao and Las Vegas, the casino still has the same opulence, décor, high-end restaurants, and touch of the Wynn family. Here's a picture of my wife Arriane and me at Encore Boston Harbor...

Things were slower than normal, but just the fact that Encore Boston Harbor was fully open says a lot about where the U.S. and world are headed.

I've been predicting many companies that got beaten up during the pandemic will recover strongly as the economy starts to reopen...

Many businesses will have the opportunity to not just recover, but to take share from weaker performers and come out stronger after the pandemic.

I've been pounding the table on this "Survive and Thrive" theme in my newsletters since September 2020.

And now that the reopening is gaining steam, it's understandable that investors who have been watching certain industries may rush to make investments.

For example, the gambling industry was hit especially hard during the pandemic. With social distancing requirements in place, casinos that never used to shut off the lights were closed down... or were barely allowed to let anyone in.

But now, folks are expecting casino companies like Wynn to take off as people get back to normalcy.

However, the recovery alone isn't enough to make a company a compelling Survive-and-Thrive name...

One of the biggest traits I look for in this theme is to find companies that the market isn't yet pricing for recovery.

When it comes to stock valuations, most investors use a discounted cash flow ("DCF") model. Simply put, it takes assumptions about the future and produces the "intrinsic value" of the stock.

However, at Altimetry, we know models with garbage-in assumptions will naturally come out as garbage. Instead, with our Embedded Expectations analysis and "Uniform Accounting" standards, we turn the DCF model on its head. We use the current stock price to determine what returns the market expects.

Let's take a closer look at Wynn through this lens...

In the chart below, the dark blue bars represent Wynn's historical corporate performance levels in terms of Uniform return on assets ("ROA"). The light blue bars are Wall Street analysts' expectations for the next two years. Finally, the white bars are the market's expectations for how the company's ROA will shift over the next five years.

Since 2016, Wynn has generated middling Uniform ROA levels around 7%. Even before the pandemic caused the company's returns to plummet to negative 10% last year, Wynn wasn't a highly profitable business.

And yet, with the market excited about a return to normalcy, investors are pricing returns to surge to 11%. Based on pre-pandemic performance, this doesn't look reasonable.

Nothing has changed about Wynn's operations since before the pandemic. It still operates the same lavishly appointed casinos... And it hasn't moved aggressively into online sports betting, iCasino gambling, or any other potential strategy to transform the business.

Wall Street analysts appear to recognize that the world's reopening won't mean Wynn starts printing money in a way it hasn't for more than half a decade. Analysts expect Wynn's Uniform ROA to only recover to negative 1% levels by 2022.

Take a look at the breakdown...

While I'm happy to be able to swing by Encore Boston Harbor now that the world is reopening, that doesn't mean I think everyone should run out to buy Wynn's stock...

The market is already pricing in a lot of good news. And that means this company will have a tough time beating expectations.


Joel Litman

Editor's note: While Wynn doesn't look compelling, Joel recently recommended a prime Survive-and-Thrive candidate to his Altimetry's Hidden Alpha subscribers... It's another gambling company whose recovery ISN'T yet priced in. And that positions it for massive upside coming out of the pandemic. To access this opportunity, you can sign up for Hidden Alpha for 75% off the first year... Learn more here.

Further Reading

The market often discounts some of the biggest names in the hottest sectors. Based on traditional metrics, this company looked like it had a mediocre 2020. But a closer look shows that it had a banner year... Get the full story here: Here's the Winner From the 'Great Reshuffling.'

The distortions in as-reported accounting are underselling just how well one of the biggest winners throughout the pandemic has done. Despite making excellent returns, the market isn't valuing the company for what it's actually worth... Read more here: The Software Giant Behind the 'King of Calendars' Is Still a Winner.

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Market Notes


Today's chart shows that a business doesn't have to be flashy to thrive...

Regular readers know that some of the best companies are downright "boring." They don't have exciting business models or sell the "next big thing" to make profits... And they don't have to spend a lot of money to change or innovate. Today's stock is bringing in steady gains over time...

Cintas (CTAS) is a $40 billion uniform provider and cleaner. It supplies things like logo mats, restroom supplies, first aid, safety, and fire protection, and more. And while this might not be a sexy new trend, providing uniforms and protective equipment is still a solid business today... Despite lingering challenges from the COVID-19 pandemic, Cintas' sales for the latest quarter remained roughly flat year over year. And net income increased 10.2% to $258.4 million.

As you can see, CTAS has soared 285% over the past five years. Shares recovered quickly from the 2020 market drop, and they recently hit new all-time highs. As Cintas keeps selling uniforms and work supplies, this boring business should keep trucking along...