Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Wynn Resorts Ltd (WYNN, Financial). The stock, which is currently priced at $85.49, recorded a loss of 5.69% in a day and a 3-month decrease of 17.81%. The stock's fair valuation is $147.29, as indicated by its GF Value.
Understanding GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock, derived from a unique methodology. It is calculated based on three factors: historical multiples such as PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow; an adjustment factor based on the company's past returns and growth; and future estimates of the business performance. The GF Value Line suggests the fair price at which the stock should trade. If the stock price is significantly above the GF Value Line, it is overvalued, and if it is below, it could indicate that the stock is undervalued.
However, an attractive valuation alone is not enough. Investors must delve deeper, considering risk factors such as Wynn Resorts's low Altman Z-score of 0.91. With revenues per share and Earnings Per Share (EPS) declining over the past five years, questions arise: Is Wynn Resorts a hidden gem or a potential value trap? These indicators suggest the latter, emphasizing the need for thorough due diligence.
Deciphering the Altman Z-Score
Before assessing Wynn Resorts's financial health, it's crucial to understand the Altman Z-score. This financial model, developed by Professor Edward I. Altman in 1968, predicts the likelihood of a company facing bankruptcy within two years. It combines five financial ratios into a weighted score, where below 1.8 indicates high financial distress and above 3 suggests low risk.
Snapshot of Wynn Resorts
Wynn Resorts operates luxury casinos and resorts, founded in 2002 by Steve Wynn. It has established megaresorts in Macau and Las Vegas, with plans to expand. Despite its prestigious portfolio, the company's financials reflect a discrepancy between the current stock price and the GF Value. This juxtaposition sets the stage for a deeper evaluation of the company's financial health and investment potential.
Probing Wynn Resorts's Low Altman Z-Score
Wynn Resorts's financial health may be more fragile than it appears, as suggested by its low Altman Z-score. The declining Retained Earnings to Total Assets ratio over recent years (2021: -0.17; 2022: -0.23; 2023: -0.21) points to a reduced ability to reinvest or manage debt, negatively impacting the Z-Score.
Warning Signs: Declining Revenues and Earnings
Wynn Resorts's revenue per share has been on a downward trajectory for the last five years (2019: 61.98; 2020: 28.69; 2021: 30.38; 2022: 33.20; 2023: 50.45), with a 5-year revenue growth rate of -15.7%. This decline raises concerns about the company's market demand and competitive position, which could jeopardize future performance.
The Red Flag: Sluggish Earnings Growth
Despite an appealing price-to-fair-value ratio, Wynn Resorts's declining revenues and earnings overshadow its investment appeal. A low price relative to intrinsic value may indicate an opportunity, but this holds true only if the company's fundamentals are robust. The downward trend in Wynn Resorts's financials may be more indicative of a value trap than an opportunity.
Conclusion
While Wynn Resorts Ltd (WYNN, Financial) presents an ostensibly undervalued stock according to the GF Value, the underlying financial health of the company suggests caution. The combination of a low Altman Z-score, declining retained earnings, and falling revenues per share positions Wynn Resorts as a potential value trap. Investors should consider these warning signs and conduct meticulous research before making investment decisions. For those seeking financially sound investments, GuruFocus Premium members can explore stocks with high Altman Z-Scores through the Walter Schloss Screen, and identify stocks with strong revenue and earnings growth using the Peter Lynch Growth with Low Valuation Screener.
This article, generated by GuruFocus, is designed to provide general insights and is not tailored financial advice. Our commentary is rooted in historical data and analyst projections, utilizing an impartial methodology, and is not intended to serve as specific investment guidance. It does not formulate a recommendation to purchase or divest any stock and does not consider individual investment objectives or financial circumstances. Our objective is to deliver long-term, fundamental data-driven analysis. Be aware that our analysis might not incorporate the most recent, price-sensitive company announcements or qualitative information. GuruFocus holds no position in the stocks mentioned herein.
