Wynn Resorts: Snake Eyes For Investors?

Set in Las Vegas, the hit show CSI: Crime Scene Investigation hooked viewers by setting loose a band of cool empiricists at fantasy's hot epicenter. One moment, a lady steps out of her red, backless dress; the next, an investigator checks a corpse's liver temperature. The contrast might help investors understand Vegas'

hottest stock: Wynn Resorts (WYNN ), the vehicle that serial casino impresario Steve Wynn is using to finance the development of his two latest properties. Wynn Macau, a 600-room resort on the Chinese island near Hong Kong, isn't due to open before 2006. Yet by next April, Wynn Las Vegas is set to host its first guests. Already, Wynn has plans to expand it. On Nov. 16 the company imploded what was left of the old Desert Inn to make way for what it's calling Encore at Wynn Las Vegas. As the Desert Inn fell, Wynn Resorts shares hovered above $57 -- more than double where they were at the dawn of 2004.

INVESTORS MAY BE PARTYING in fantasyland, though. To see what I mean, put on a CSI forensics jumpsuit (good for protecting cocktail attire from blood and tissue samples) and coolly examine the clues. First you might look for profits at Wynn Resorts. You'd find no evidence of them -- in fact, there are no revenues to speak of. Since its inception, Wynn Resorts has spilled $181 million in red ink while developing its properties. Next, check cash flow: Mostly by sales of stock ($808 million worth) and bonds ($1.2 billion), Wynn Resorts had raised $2.2 billion through September. Operations, buying real estate, and construction costs used up more than $2 billion. On Nov. 15, Wynn Resorts raised a fresh $453 million by selling 7.5 million more new common shares.

That brought the total number of shares Wynn has issued, or is on the hook to issue via options, restricted stock, and convertible debentures, nearly to 110 million. At $57 a share, that gives Wynn Resorts an equity value of $6.3 billion. Investigators might ask: What other companies have equity values over $6 billion but revenues under, to be generous, $100 million? A check of the Value Line Investment Survey (VALU ) data base, with 7,824 companies, finds just one other with a market value of more than $6 billion on $100 million or less in revenue: Sirius Satellite Radio. No other public companies with that little in revenue have market caps of even $3 billion.

One day -- perhaps next year, after Wynn Las Vegas opens -- operations will produce cash. How much cash flow would justify its valuation? Including debt, Wynn's enterprise value is about $7 billion. That's what a takeover would cost. You can get a clue about the hopes held in that figure by comparing Wynn to two rivals that this year agreed to buyouts. Caesars Entertainment (CZR ) accepted an offer of $9.4 billion from Harrah's Entertainment (HET ); Mandalay Resort Group (MBG ) is taking a bid of $8.1 billion from MGM Mirage (MGG ). Wynn's valuation is in the same league, though Caesars and Mandalay today operate far more hotel rooms and much more casino space than Wynn has dared envision. For years to come they figure to generate many times more cash flow.

No survey of Wynn's stock market value would be complete without a glance at Steve Wynn's record at Mirage Resorts. Its shareholders saw average annual gains of 25%. Investors buying into Wynn Resorts must be hoping for an encore. Discarding their latex gloves, the CSI crew would conclude that this bet isn't likely to pay out any more than it already has.

By Robert Barker

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