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NEW YORK (CNN/Money) – Wynn Resorts, the publicly traded casino company run by Vegas legend Steve Wynn, has soared nearly 400 percent since it started trading in October 2002...and the company's first casino hasn't even opened yet.
Wynn Las Vegas is set to open its doors on April 28. But investors have so far been willing to bet on the reputation of Steve Wynn, the brainchild behind several successful casinos in Sin City, including the Golden Nugget, Mirage and Bellagio. (Wynn's former company, Mirage Resorts, was sold to MGM Grand in 2001 and is now known as MGM Mirage.)
"Steve Wynn has a terrific record of building and developing premier entertainment and lodging facilities in Las Vegas," said Morris Mark, chief investment officer of Mark Asset Management, a New York-based investment firm that owns shares of Wynn Resorts (Research).
"We don't own many stocks that aren't already generating a lot of free cash flow but in this case, we got interested because it's pretty obvious that there's a great deal of franchise value here," Mark added.
Expensive but worth it?
But is this optimism already factored into the stock price? Shares trade at about 157 times 2005 earnings estimates and 58 times 2006 projections for 2006. At those high-roller valuations, investors must be counting on lots of millionaires throwing away their disposable income at the baccarat tables.
Dan Ahrens, co-manager of the Vice fund, which invests in so-called "sin stocks," said he has taken a pass on the stock because it is priced for perfection.
"I have all the faith in the world in Steve Wynn," said Ahrens. "But a possible downside is the sky-high expectations that the company has to live up to. I'd be interested if the stock pulls back and will watch it closely over the next few quarters."
Still, others think the timing might be right. For one thing, the stock has already pulled back a bit, down about 13 percent since early March because of concern that rising oil prices could hurt tourism and because some investors may be "selling on the news" of the casino's opening.
In addition, business has been booming for most casino operators during the past two and a half years thanks to a return of tourists to Las Vegas following the 9/11 attacks.
Shares of Harrah's Entertainment (Research) are up 56 percent since Wynn's initial public offering, for example, while MGM Mirage (Research) is up 120 percent. Another casino operator that went public in December, Las Vegas Sands (Research), which owns the Venetian, has gained more than 40 percent since its IPO.
And in a recent research report, Deutsche Bank analyst Marc Falcone, said that investors should take advantage of any sell-offs. He points out that Wynn Las Vegas is the first new major casino opening on Las Vegas' famed Strip in five years. As such, he thinks that the company will have no problem filling up its rooms and should be able to command premium rates for them as well.
"Wynn rates are tracking at a 10 percent to 15 percent premium to the market and are averaging $300-$330 through November," Falcone said in his report, adding that current estimates may wind up being too low for Wynn as a result of these favorable booking trends. (Falcone does not own the stock but Deutsche Bank was one of the underwriters of the company's IPO.)
Raising the stakes in China
Analysts expect Wynn Resorts to generate $722 million in revenue this year and a profit of 41 cents a share, according to estimates from Thomson/First Call. And next year, Wall Street thinks the company will really hit the jackpot: consensus estimates call for a sales increase of 85 percent to $1.34 billion and a 170 percent surge in earnings to $1.11 per share.
Wynn Resorts also has another thing in its favor that most other gaming companies do not: next year it will be opening a casino in Macau, a Chinese resort city located on a small island close to Hong Kong.
Las Vegas Sands, which has already opened a Venetian on Macau, and Shun Tak holdings, a firm controlled by Hong Kong businessman Stanley Ho, were the only other companies given permission to operate casinos in Macau.
Fernando Vinzons, an analyst with Driehaus Capital Management, a Chicago-based investment firm that owns the stock, said that the casino in Macau could wind up being a tremendous windfall for Wynn and investors might not realize that yet.
"Some people expect the stock to fall further when Wynn Las Vegas opens. But the company's biggest opportunity is still waiting in the wings with Macau so we see a potential sell-off as a time to buy," Vinzons said.
Finally, Falcone said in his report that investors need to take into consideration that Wynn Resorts has 137 acres of undeveloped land in Las Vegas. He thinks this real estate is worth at least $10 a share. In addition, Wynn recently disclosed that it is already planning to build a second casino in Las Vegas, to be called Encore.
So despite the big run in the stock, it seems that investors who have rolled the dice on Wynn don't appear to be ready to leave the table just yet.
"Macau, Las Vegas and Steve Wynn. Putting the three together got me interested," Mark said. "This is a tremendous opportunity."
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