Wynn Stock Earns Morgan Stanley Upgrade, Bank Calls it Favored Cyclical Play

Posted on: November 2, 2020, 09:03h. 

Last updated on: November 2, 2020, 09:41h.

Wynn Resorts (NASDAQ:WYNN) is starting November on a strong note. It’s rallying on the back of an upgrade by Morgan Stanley.

Wynn Resorts
The Wynn Macau integrated resort. Morgan Stanley upgraded the stock today, sparking a rally. (Image: Bloomberg)

The bank raised its rating on shares of the Encore operator to “overweight” from “equal-weight,” while lifting its price target on the name to $95 from $90, implying upside of 29 percent from last Friday’s close. That’s slightly ahead of the average Wall Street forecast of about $93.

We upgrade Wynn as we see 1) an upcoming operating inflection with further upside post-COVID, 2) overblown concerns about Macau high-end, & 3) a positive catalyst if Biden wins, all at an attractive valuation,” according to Morgan Stanley.

The bank anoints Wynn stock as its new favored cyclical idea. Shares of the Encore Boston Harbor operator are lower by almost 48 percent year-to-date but are up more than three percent with the help of the Morgan Stanley upgrade.

Electoral Implications

In the wake of the coronavirus pandemic, operators with exposure to Macau continue struggling, as visits to the world’s largest gaming center remain slack, pinching gross gaming revenue (GGR) in the process.

That, coupled with President Trump’s heavy-handed approach to relations with China, are among the factors weighing on Wynn stock this year. That’s because the gaming company depends on Macau for 75 percent or more of its earnings before interest, taxes, depreciation and amortization (EBITDA) and revenue in normal quarters.

As such, in advance of tomorrow’s US elections, some gaming analysts are saying a victory by former Vice President and Democratic nominee Joe Biden will benefit Macau operators, including Wynn. That’s because his administration will likely take a softer tone toward geopolitical relations with the world’s second-largest economy.

Along those lines, there’s also chatter that a win by Biden will ease the concession renewal process for US-based Macau operators, potentially eliminating the specter of new fees and penalties or the risk that licenses won’t be renewed at all.

Bull Case for the Patient

Morgan Stanley analyst Thomas Allen lays out a bull case for Wynn stock. He notes it’s possible the stock could climb to $185, more than double current levels if 2022 EBITDA comes in at or tops $2.3 billion.

He said there’s also potential with the company’s small, but growing, sports wagering operation. Over the near-term, however, there’s a lot riding on the outcome of Tuesday’s US election.

“We believe a Biden victory, while not completely resolving the tenuous trade relations btw. the US and China, would at least help mitigate the extreme bear case that WYNN’s concession would not be renewed,” the analyst said. “We would expect to see Wynn stock re-rate if Biden wins the presidency.”

Prior to Allen’s call, the last two analyst rating actions on Wynn stock were downgrades.