At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." The pinstripe-and-wingtip crowd is entitled to its opinions, but we have some pretty sharp stock pickers down here on Main Street, too. And we're not always impressed with how Wall Street does its job.
So perhaps we shouldn't be giving virtual ink to "news" of analyst upgrades and downgrades. And we wouldn't -- if that were all we were doing. Fortunately, in "This Just In," we don't simply tell you what the analysts said. We also show you whether they know what they're talking about.
Wynn books a win
When Bloomberg comes out with a report showing that Macau gambling revenues in September posted their weakest growth rates in at least six months, you wouldn't ordinarily expect that to be good news for gambling stocks. But you'd be wrong.
Or at least, you'd be wrong today, as investors in the major Macau moguls see their share prices spike in response to the news. On Tuesday, Bloomberg reported that gambling revenues in the Chinese gaming enclave hit 21.2 billion Macau patacas (no relation to the former governor of New York) in September. And while as an absolute number that was better revenue than Macau collected in June, it also equated to just 38.8% annual growth, which was the weakest showing we've seen in the region since January.
Regardless, the news seemed to belie recent fears that credit was drying up for Macau's "junket" recruiters and would starve the area of needed business. The news quickly sent shares of Melco Crown Entertainment
Now, Nomura isn't exactly an unheard of name here at the Fool -- but as one of several analysts that steadfastly refuse to make their recommendations public through ratings aggregator Briefing.com, it has always been a bit of a mystery to us. Lacking a complete public record of its picks and pans, it's hard to say for certain how much Nomura's advice is worth.
Be that as it may, if Nomura's willing to come out of its shell today, I'm willing to listen. So here's what it has to say: According to the analyst, Wynn's basically a win for two reasons. First, Nomura notes that Wynn paid its shareholders a "special dividend" of $8 a share late last year, and the analyst believes that with more than $14 a share cash in hand today, there's every chance Wynn will deliver a similar Christmas gift in Q4 of this year as well. Second, and longer-term, Nomura argues that investors have overreacted to fears of a slowdown in China, with the result that Wynn shares have become gravely undervalued.
With Macau still being the only region of China where gambling is legal, Nomura sees little threat to gaming growth through the next year. As a result, when you combine Wynn's 66% long-term earnings growth estimates with the stock's 37 trailing earnings valuation, the stock looks priced for further gains. (And indeed, if 39% revenue growth is considered "bad" news in Macau, I'd say strong earnings growth here is pretty much a given.)
Count your Wynn-ings
Just last month, I had the opportunity to review the valuations at several of Macau's major operators -- Wynn included -- and came to a similar conclusion. If memory serves, I believe I wrote: "This stock looks cheap if Wynn can produce earnings growth anywhere near what it's expected to."
I stand by that prediction today, with one modification. When I last endorsed Wynn, the company's shares were selling for 49 times earnings. Today, these same shares fetch a more modest multiple of 37. Yet Wynn is still pegged for 66% long-term profits growth, and it is still generating real free cash flow at a rate 3.5 times as great as GAAP earnings accounting gives it credit for.
With its valuation of just 11 times annual free cash flow, I'm forced to repeat myself: Right now, this stock is about the closest thing to a sure thing you're likely to find. When it comes to Wynn Resorts, always bet on green.
Wynn may be the best bet in Vegas, but it's not the only stock worth watching. Add each of the major casino operators to your Fool Watchlist:
Fool contributor Rich Smith owns no shares of any company named above. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 268 out of more than 180,000 members. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insightsmakes us better investors. The Motley Fool has a disclosure policy.