WYNN Resorts (WYNN) – Bet the Don’t Pass Line (SHORT)

December 11, 2009 10:45 am

We have been watching Wynn Resorts (WYNN) as it has had trouble breaking above the $68-$70 resistance level. Even after the Macau IPO last month, which provided a $1.3 billion wynn-fall, and the restructuring of $500 million of debt – the shares have been under pressure.

In October we were successful with a short that was initiated with technical conditions that are very similar to those we are seeing today. The difference is that this time we do not see catalysts to move shares much higher.

First, lets look at the fundamental argument.

EPS growth rate over the long term has been 156%. That would be fantastic until we look closer at the P/E ratio of 294. What that tells is is that the PEG ratio is upwards of 2, a sign that shares may be overvalued.

Debt is still high, coming in at a whopping 269%. Comparative quarterly sales growth has been slowing to a point that it has been negative for the past 4 quarters. Earnings for 2009 are expected to total $0.24 per share and double to $0.56 in 2010. Now, compare that to 2007 when earnings were $2.97 and 2008 at $2.51.

Insiders have been selling of late at a pace not seen for some time. (See Barron’s article below)

Finally, the special dividend of $4 per share paid last month drained about $500 million (123 million shares outstanding) from the IPO proceeds. That was a great move by Mr. Wynn as discussed HERE.

wynn_short

As for the technical discussion, the chart above shows a few trends that we should consider.

The slow-stochastics are rolling down from a slightly overbought position since the end of November. In addition, the trend is for lower lows and lower highs for this oscillator.

We could make a case for an inverse head-and-shoulders pattern, which would be considered a bullish indicator, but many of the important conditions do not fit.

The left and right shoulders should have come down further to shake out investors. There was still a significant amount of price support both times, yet there was increased volume on the bottoms and a decrease in volume when breaking through the neckline.

The 50-day average is now rolling over and is being tested again. The last time occurred there was a brief bounce on below average volume that failed to break above resistance.

We had last shorted the shares for clients of The Disciplined Managed Growth Strategy at $62 and covered around the $57 support zone. We have again initiated a short position at ~$65 and will stop-out if the shares break above the resistance of ~ $68-$70.

From Barron’s.com

CASINO SHARES HAVE CLIMBED OUT of the doldrums after the initial recessionary hit, and growth at Wynn Resorts (ticker: WYNN) has largely bested peers. Now a group of Wynn insiders are taking their winnings and walking away, with one prominent executive selling $19.9 million in shares.dontpass

Marc D. Schorr, Wynn’s chief operating officer, sold 298,723 shares for an average price of $66.67 on Dec. 3. After the sale, he held 275,000 unvested restricted shares and 50,000 exercisable options. Schorr’s stake remains less than 1% of the company’s outstanding shares.

Included in the sale were all of the remaining shares — 173,723 — left in a living trust set up for him and his wife.

Also on Dec. 3, Linda Chen, president of Wynn International Marketing, sold 10,000 shares for $675,000. And on Nov. 20, Kimmarie Sinatra, Wynn Resorts’ senior vice president and general counsel, sold 35,000 shares for $2.2 million.

The sales have been the first by Wynn insiders since Chairman Steve Wynn and his wife Elaine sold $114 million in shares to fund their pending divorce. (See Inside Scoop, “Wynn Resorts CEO’s $114 Million Sale,” Aug. 19, 2009.)

The casino and hotel operator’s shares have risen 66% over the past six months, exceeding the 59% gain for Las Vegas (LVS) and the 42% gain for MGM Mirage (MGM).

Wynn Resorts did not respond to a request for comment on the sale.

Wynn Resorts operates two hotels and casinos on the Las Vegas strip and another in Macau. Casinos suffered when the recession hit, and corporations and individuals curtailed luxury spending, but Wynn’s shares have shot back up in the recent rally.

On Nov. 9, Wynn announced a special $4-cash dividend payable on Dec. 3 to shareholders of record on Nov. 19.

Schorr has been in his current position since June 2002. Prior to that, he was COO of Wynn predecessor Valvino and CEO and president of Wynn Las Vegas. He also served as president of the Mirage Casino-Hotel, then a subsidiary of Mirage Resorts.

Ben Silverman, director of research at InsiderScore.com, says the recent cluster sale is concerning, in part because it’s the first at Wynn in three years. He noted in a research report that Schorr is left with only unvested restricted shares and options.

“In other words, Schorr’s equity in the company is on the table but it’s not really in his pocket,” Silverman wrote.

He dismissed theories that the shares were related to a prior pledge that Schorr made and said that Schorr isn’t experiencing a cash crunch, as evidenced by his recent contributions to a fund to buy basketball tickets for Las Vegas school district employees.

Wynn may be hurt by the additional hotel rooms being added to the already glutted Vegas market with next week’s opening of the 4,004-room Aria Resort and Casino, Silverman posited.

“Barring an explanation involving mitigating circumstances, Schorr’s sale, as well as those by the other two executives, are a troubling signal heading into the end of the year,” he wrote.

But in a Dec. 3 report, Wedbush analyst Rachel Rothman raised her estimates for Wynn after Macau revenues surprised to the upside.

“November’s result was surprisingly strong and marks the fifth consecutive month of year-over-year gaming revenue growth,” she wrote in a note. “We are changing our estimated 2010 and 2011 earnings before interest, taxes, depreciation and amortization [Ebitda] for Wynn to $753 million and $762 million from $714 million and $757 million, respectively.”

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Disclosure: Horowitz & Company clients may hold positions of securities mentioned as of the date published.

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