Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – November 2014. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a specific look at how Wynn Resorts Limited (WYNN) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): Wynn Resorts, Limited is a developer, owner and operator of destination casino resorts. The Company owns and operates two destination casino resorts. In Las Vegas, Nevada, the Company owns and operates Wynn Las Vegas, which includes Encore at Wynn Las Vegas. In the Macau Special Administrative Region of the People’s Republic of China (Macau) the Company owns and operates Wynn Macau, which includes Encore at Wynn Macau. The Company has two segments: Las Vegas Operations and Macau Operations. The Company refers to the integrated Wynn Las Vegas and Encore at Wynn Las Vegas resorts as Wynn Las Vegas, Encore or as its Las Vegas Operations. The Company refers to the integrated Wynn Macau and Encore at Wynn Macau resorts as Wynn Macau, Encore or as its Macau Operations.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 3/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – PASS
- Sufficiently Strong Financial Condition – current ratio greater than 2 – PASS
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – PASS
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 4/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – PASS
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – PASS
- Dividend Record – currently pays a dividend – PASS
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Value Based on 3% Growth||$89.02|
|Value Based on 0% Growth||$52.18|
|Market Implied Growth Rate||9.10%|
|Net Current Asset Value (NCAV)||-$55.07|
Balance Sheet – September 2014
Earnings Per Share
Earnings Per Share – ModernGraham
Wynn Resorts Limited qualifies for the Enterprising Investor but not for the Defensive Investor. The Defensive Investor is concerned by the lack of stable earnings or dividends over the last ten years, and the high PEmg and PB ratios. The Enterprising Investor is only concerned by the high level of debt relative to the net current assets. As a result, Enterprising Investors following the ModernGraham approach based on Benjamin Graham’s methods should feel very comfortable proceeding with further research and comparing the company to other opportunities. As for a valuation, the company appears to be undervalued after growing its EPSmg (normalized earnings) from $1.59 in 2010 to an estimated $6.14 for 2014. This level of demonstrated growth is greater than the market’s implied estimate of 9.1% earnings growth and leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value above the price.
Be sure to check out previous ModernGraham valuations of Wynn Resorts Limited (WYNN) for greater perspective!
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on Wynn Resorts Limited (WYNN)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author did not hold a position in Wynn Resorts Limited (WYNN) or in any other company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.