Is Wynn's Stock Cheap or Expensive by the Numbers?

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Numbers can lie -- yet they're the best first step in determining whether a stock is a buy. In this series, we use some carefully chosen metrics to size up a stock's true value based on the following clues:

  • The current price multiples.
  • The consistency of past earnings and cash flow.
  • How much growth we can expect.

Let's see what those numbers can tell us about how expensive or cheap Wynn (NAS: WYNN) might be.

The current price multiples
First, we'll look at most investors' favorite metric: the P/E ratio. It divides the company's share price by its earnings per share (EPS) -- the lower, the better.

Then we'll take things up a notch with a more advanced metric: enterprise value to unlevered free cash flow, which divides the company's enterprise value (basically, its market cap plus its debt, minus its cash) by its unlevered free cash flow (its free cash flow, adding back the interest payments on its debt). As with the P/E, the lower this number is, the better.

Analysts argue about which is more important -- earnings or cash flow. Who cares? A good buy ideally has low multiples on both.

Wynn has a P/E ratio of 26.3 and an EV/FCF ratio of 10.1 over the trailing 12 months. If we stretch and compare current valuations with the five-year averages for earnings and free cash flow, we see that Wynn has a P/E ratio of 69.4 and a five-year EV/FCF ratio of 64.0.

A positive one-year ratio of less than 10 for both metrics is ideal (at least in my opinion). For a five-year metric, less than 20 is ideal.

Wynn is 0-for-4 on hitting the ideal targets, but let's see how it stacks up against some of its competitors and industry mates. 

Company

1-Year P/E

1-Year EV/FCF

5-Year P/E

5-Year EV/FCF

Wynn26.310.169.464.0
MGM Resorts International (NYS: MGM) 1.719.717.960.7
Las Vegas Sands (NYS: LVS) 22.931.4115.4NM
Boyd Gaming (NYS: BYD) NM15.019.646.7

Source: S&P Capital IQ; NM = not meaningful because of losses.

Numerically, we've seen how Wynn's valuation rates on both an absolute and relative basis. Next, let's examine ...

The consistency of past earnings and cash flow
An ideal company will be consistently strong in its earnings and cash-flow generation.

In the past five years, Wynn's net income margin has ranged from -4.7% to 14.1%. In that same time frame, unlevered free cash flow margin has ranged from -17.5% to 30%.

How do those figures compare with those of the company's peers? See for yourself:

anImage

Source: S&P Capital IQ; margin ranges are combined.

Source: S&P Capital IQ; margin ranges are combined.

In addition, over the past five years, Wynn has tallied up four years of positive earnings and two years of positive free cash flow.

Next, let's figure out ...

How much growth we can expect
Analysts tend to comically overstate their five-year growth estimates. If you accept them at face value, you willoverpay for stocks. But even though you should definitely take the analysts' prognostications with a grain of salt, they can still provide a useful starting point when compared with similar numbers from a company's closest rivals.

Let's start by seeing what this company's done over the past five years. In that time period, Wynn has put up past EPS growth rates of -7.5%. Meanwhile, Wall Street's analysts expect future growth rates of 35.6%.

Here's how Wynn compares with its peers for trailing-five-year growth (because of losses, Boyd's trailing growth rate isn't meaningful):

anImage

Source: S&P Capital IQ; EPS growth shown.

Source: S&P Capital IQ; EPS growth shown.

And here's how it measures up with regard to the growth analysts expect over the next five years (Note: My data provider doesn't list any estimates for MGM, but Yahoo! Finance lists 39%):

anImage

Source: S&P Capital IQ; estimates for EPS growth.

Source: S&P Capital IQ; estimates for EPS growth.

The bottom line
The pile of numbers we've plowed through has shown us the price multiples that shares of Wynn are trading at, the volatility of its operational performance, and what kind of growth profile it has -- both on an absolute and a relative basis.

The more consistent a company's performance has been and the more growth we can expect, the more we should be willing to pay. We've gone well beyond looking at a 26.3 P/E ratio, and Wynn's one-year EV/FCF ratio is a low 10.1. However, its five-year price multiples are much higher.

From the volatile margins and profitability of Wynn and its peers, we see a good snapshot of the casino industry. It tends to be marked with high sensitivity to economic conditions, leveraged balance sheets, and seemingly insatiable expansion.

Wynn has been in expansion mode in both Las Vegas and Macau in recent years but is now reaping some of the rewards of those expansions. Its balance sheet has also gotten healthier in recent years. Wynn is certainly looking better than it was last year, when I advised selling for 2011 (the stock is up a little in a flat market since then). Currently, I don't feel strongly one way or the other on Wynn. There are some good initial numbers and some bad ones. Meanwhile, our resident casino expert, Travis Hoium, likes what he's seeing at Wynn, but he likes another casino stock even more

If you find Wynn's numbers or story compelling, don't stop here. Continue your due-diligence process until you're confident one way or the other. As a start, add it to My Watchlist to find all of our Foolish analysis.

You can also see the stocks that I've researched beyond the initial numbers and bought in my public real-money portfolio.

At the time this article was published Anand Chokkaveludoesn't own shares in any company mentioned.Try any of our Foolish newsletter servicesfree for 30 days. We Fools don't all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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