MGM Resorts' Shares Down 16.3% in 1 Year: Can it Recover?
MGM Resorts International’s MGM growth potential lies in the company’s business model that has extensive non-gaming revenue opportunities. Further, high-quality assets and attractive property locations have been major growth drivers. However, intense competition and a debt-laden industry raise concern.
In the second quarter of 2018, MGM Resorts’ earnings met analysts’ expectations but declined 16.1% from the prior-year quarter. Moreover, it recorded an average miss of 22.6% in the trailing four quarters. Earnings estimates for the third quarter and 2018 have also declined 41.7% and 10.1%, respectively, over the past two months, reflecting analysts’ doubt surrounding the future earnings potential of the company.
Followed by such unimpressive earnings trend, shares of MGM Resorts have lost 16.3% in the past year compared with the industry's decline of 10.3%.
Let us look deeper into the company’s strengths and limitations.
Focus on Brand Building to Drive Traffic
In the past few years, MGM Resort has taken various initiatives to align every recognized brand into one global entertainment brand. This resulted in a disciplined business model, with a unified assessment. The company’s core strategies include optimizing its customer mix, leveraging the casino database in a targeted way and including profitable business into its portfolio.
Despite having well-diversified properties in the United States, MGM Resorts is not slowing down in terms of domestic ventures. It is in a solid position, with The Park, The Plaza, T-Mobile and New York-New York, which is likely to continue drawing more people to Las Vegas. MGM Resorts believes that concerts and events hold the key to increasing visitation and profits, and with a strong lineup of the same coming up, traffic in the region is expected to increase.
Partnership Ventures to Cash In on Sports Betting Opportunities
Per Eilers & Krejcik Gaming 2017 reports, legal sports betting market is likely to garner $6.03 billion in revenues annually by 2023. Scope for MGM Resorts and other casino giants like Penn National Gaming PENN has intensified, following the legalization of sports betting outside Nevada as the illegal betting in the United States is valued at billions of dollars annually.
In an effort to fortify its grip in the budding gaming industry, MGM Resorts seems to be undertaking partnership ventures that would drive its market share gains. To this end, MGM Resorts partnered with Boyd Gaming BYD, and both the companies have initiated opportunities to offer online and mobile gaming platforms, including sports betting, casino gaming and poker.
Moreover, MGM Resorts recently entered an agreement with new professional football league — The Alliance of American Football (“AAF”). Per the deal, the company will not only invest in AAF but also be the exclusive in-game gambling partner of the same for three years.
Further, MGM Resorts announced a multi-year partnership with National Basketball Association, under which the former becomes the official partner of NBA and WNBA. Under the partnership, MGM Resorts will use official NBA and WNBA data and branding, on a non-exclusive basis, across MGM Resorts' land-based and digital sports betting offerings throughout the United States.
Concerns
MGM Resorts operates in the highly competitive markets of Las Vegas and Macau. Increased hotel openings and promotional activities have made these markets highly competitive. Thus, excess supply, especially in the Macau market, might reduce the company’s market share. Its upcoming projects are expected to face extreme peer pressure from several Chinese casino operators as well as The Parisian Macao and Sands Cotai Central project of Las Vegas Sands LVS.
Moreover, MGM Resort’s heavy reliance on debt financing remains a concern. As of Jun 30, 2018, cash and cash equivalents were $1.3 billion compared with a much higher long-term debt of $13.5 billion. However, any severe slowdown in future macroeconomic and credit market conditions can affect the company’s ability to pay or refinance debt.
MGM Resorts currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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