Warren Buffett attracts a lot of attention. As the world's third-richest person and most celebrated investor, thousands try to glean what they can from his thinking processes and track his investments.
While we can't know for sure whether Buffett is about to buy Wynn Resorts
In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size, proven management, and a reasonable valuation, he demands:
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- Simple, non-techno-mumbo-jumbo businesses.
Does Wynn meet Buffett's standards?
1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.
Let's examine Wynn's earnings and free cash flow history:
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.
Over the past five years, Wynn has experienced some earnings volatility due to the financial crisis and economic downturn.
2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it actually is.
Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.
|
Company |
Debt-to-Equity Ratio |
Return on Equity (LTM) |
Return on Equity (5-year average) |
|---|---|---|---|
|
Wynn Resorts |
122% |
17% |
15% |
|
MGM Resorts |
414% |
(43%) |
(9%) |
|
Las Vegas Sands |
114% |
14% |
6% |
|
Melco Crown |
71% |
0% |
(6%) |
Source: Capital IQ, a division of Standard & Poor's.
Wynn produces reasonable returns on equity with a moderate debt load.
3. Management
CEO Steve Wynn has been at the job since he took the company public in 2002.
4. Business
The casino industry isn't particularly susceptible to technological disruption, though it can be susceptible to leveraged booms and busts.
The Foolish conclusion
Regardless of whether Buffett would ever buy Wynn, we've learned that while it's held up better than some of its peers and is led by tenured management, it doesn't particularly exhibit some of the other quintessential characteristics of a Buffett investment: consistent earnings and high returns on equity with limited debt.
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