Wynn’s Investors Are In Good Hands Even As Pandemic Rages In Gambling Hubs

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Wynn Resorts

As of the beginning of June, Wynn Resorts (NASDAQ: WYNN) stock had declined by about 35% since the beginning of the year. The Covid-19 induced recession has hit the hospitality industry heavily and Wynn is no exception. While the stock can recover once the pandemic is under control and people start traveling again, it is critical to examine whether Wynn has the cost structure and cash cushion to survive until that happens. We estimate that it may take until Q3/Q4 for the demand slump to recover, which could reduce the company’s revenue by at least 30% from $6.6 billion to $4.2 billion. To put things in perspective, Wynn Resorts’ revenues for the quarter ended March 2020 were down 42% as Covid-19 shut down Macau casinos. Despite this, it has made a decision to keep its employees on payroll. Does this decision make sense? Can Wynn’s balance sheet absorb the outflow?  We assess the Impact Of The Covid-19 Recession On Wynn in an interactive dashboard with a focus on Wynn’s liquidity reserves and cost structure, and conclude that despite an early and hard hit on revenue, Wynn can safely navigate the recession.

Wynn’s Revenues Could Drop At Least 30%

Wynn has already reported a 42% decline in revenue in the first quarter of 2020. Unlike other companies in the U.S. that are likely to face maximum impact in Q2, Wynn suffered in Q1 because of the closure of Macau, which accounts for 69% of revenue. April and May saw the  sharpest y-o-y fall for Macau casinos but sales are improving sequentially. For the full year, we expect Wynn’s revenues to remain at least 30% below 2019 levels as travel remains subdued, casinos operate at lower capacity to maintain safety norms, and people avoid crowded places – which casinos can very well be. While China has reported control over Covid-19 cases, Macau casinos can close again if there is a second wave. 

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However, Wynn Can Still Manage Positive Cash Flow

In 2019, Wynn generated nearly $901 million in free cash flow from operations. Its cash flow after accounting for capital expenditure was $ -162 million. If revenues fall by 30% in 2020, Wynn’s free cash flow from operations will reduce to $586 million. While it may be able to cut down on some variable expenses, it still has to manage fixed expenses due to the resorts and casino property it operates. However, it can still generate net positive cash flow if it can implement a 50% capex cut. Wynn has already slowed down capital spending in 2020 and will focus only on top priority projects.

The ability to generate cash flow in adverse conditions stems from the fact that Wynn has a flexible cost structure. We estimate that variable expenses represent a big chunk of Wynn’s operating expenses which is why it can take a significant demand hit before falling into the operating loss zone. We estimate this figure at -52%.

What happens if the demand does not pick up at all? Can Wynn sustain in the absence of any revenue? While unlikely, it is important to understand Wynn’s financial strength from this perspective because it needs to survive periods of very lean demand before the situation becomes normal and profits in the latter part of the year cover up for losses incurred in the first half. You will be surprised to see that Wynn has a huge operational runway of more than 23 months in the absence of any revenue. No wonder it has stepped up to keep all its employees on payroll – a move that is counter intuitive.

To sum things up, Wynn is in a good position to sustain itself during the Covid-19 induced recession. It not only has enough cash reserves, but also has cost and capex levers to manage cash flow. Its competitor MGM Resorts has a somewhat similar story to tell except that its runway is much shorter

Curious about the virus trajectory? Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

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