Chart of the Day – $WYNN: A Coiled Spring?

by Dan February 11, 2016 2:35 pm • Chart of the Day• Commentary

Event: Wynn Resorts (WYNN) reports Q4 results tonight after the close. The options market is implying about an 8% one day move, which is in line with the 4 qtr average of 8%, but rich to the 10 year average one day move of about 5.5%.

Regular readers know that WYNN gets more than two thirds of their sales from Macau, and Macau has been downright horrible. The last reading we got was for December sales showed a 34% year over year decline, marking the 19th consecutive monthly decline.

Price Action / Technicals: WYNN shares are down 16% so far in 2016, and down 77% from its all time highs made in early 2014.  Late last year and earlier this year shares of WYNN bounced off long term support in the low $50s. Below that there is little technical support:

WYNN 11 year chart from Bloomberg
WYNN 11 year chart from Bloomberg

To zoom in a bit, $51 is obvious support, almost like the stock’s last stand on the downside:

WYNN 1yr chart from Bloomberg
WYNN 1yr chart from Bloomberg

On the flip-side, there is little overhead resistance to about $70.

My View:  In 2009 when the stock traded as low as $16, WYNN saw its earnings decline 90% year over year, from $2.51 to 26 cents, despite sales actually increasing 2% from 2008 to 2009 to $3.05 billion. Since 2009 WYNN saw a dramatic ramp in earnings to $7.58 a share in 2014, but now has an expected 59% decrease in 2015 (to be reported tonight). The stock trades as if investors think that consensus eps estimates calling for a 2% increase in 2016 is too aggressive on a 13% yoy sales increase.  If things were to stabilize in Macau, and high rollers were to come back, corruption crackdown to slow, adverse effects of smoking bans to abate, then WYNN will be one of the first U.S. multinationals doing biz in China to absolutely rip. But those are some big ifs. And no one is going to ring the bell at the bottom, so I suspect the turn comes when results merely get less bad.  The company’s balance sheet is still ok, but a sustained downturn will put their leverage ratio in focus as the company is bringing MORE capacity online in Macau in 2016.

With 20% short interest, and the stock being unloved by Wall Street Analysts (9 Buys, and 13 Holds) the stock could act like a coiled spring on the slightest bit of good news.

Options Volatility SnapShot:  30 day at the money implied volatility (the price of options – blue below) is well above levels to its prior 4 reports, but below the flash crash lows at 76%.  While this is eye-popping, its important to note that realized volatility (how much the stock is moving-white) is at 71%, suggesting that while the absolute level of prices is high, they may not be relative to how much the stock has been moving:

From Bloomberg
From Bloomberg

For those considering directional plays into the print, it makes sense to consider short premium trades that define risk, like a short put spread if bullish, or short call spread if bearish.  This way you define your risk to the width of the spread, while your potential reward to the premium received. Generally I would target the short strike of such a spread very near the implied move.  Options traders are generally pretty good at not over-estimating implied moves, and over time as a consistent short premium strategy, selling earnings moves makes a lot of sense.

I suspect a short squeeze on merely ok results and guidance gets sold, results that are meh and the stock id down less than the implied move, and a meaningful guide down and the stock as a 4 handle soon.