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MGM Resorts Reiterated at Neutral

Zacks Equity Research

We are maintaining our long-term ‘Neutral’ recommendation on MGM Resorts International (MGM) based on its strong brand name, a solid pipeline for convention business in 2013 and 2014, refurbishment activity and progress toward China business partially offset by a lackluster performance of the VIP business in Macau, a sluggish domestic market and the adverse impact of Superstorm Sandy.

Given its powerful brand name, we believe that MGM Resorts is better positioned to command a premium rate relative to the overall gaming and lodging industry. The company’s convention bookings for 2013 and 2014 appear to be strong along with the growing FIT and leisure bookings. An impressive entertainment calendar starting from September 2012 should boost the company’s RevPAR in the fourth quarter of 2012.

MGM has been diligently working on guest satisfaction to ensure its position in a cutthroat environment. The company planned to spend around $350 million of capital in 2012, which included continued room remodeling at MGM Grand Las Vegas as well as at the Spa Tower at Bellagio. Furthermore, the upgrades at Bellagio were completed in 2011. The remodeled assets allow the company charge premium daily rates for its revamped rooms.

With a strong position in Macau, the only Chinese city where gambling is legal and the largest gaming destination in the world, MGM Resorts intends to expand further in Asia. Management recently signed a land concession deal for its Cotai project in China and closed on a $2 billion credit facility to fund the project. The project has a completion timeframe of approximately three years.

However, there is a bearish thesis as well. While MGM seems all set to head to Cotai, one of its close peers, Wynn Resorts Ltd. (WYNN), has already received the entry card to expand in Cotai. Another peer, Las Vegas Sands Corp. (LVS), has already started operating in that region, enjoying a first mover advantage among the three.

We expect revenue growth in MGM China to moderate in the wake of a slowing Chinese economy and more challenging comparisons ahead. VIP volumes in Macau remain sluggish. Business from the VIP segment is expected to be subdued in the near term.

Though the economy is showing some signs of improvement, we believe that recovery, particularly in the Las Vegas market, will be slow due to the challenging economic conditions on a domestic level.

The impact of Superstorm Sandy will also mar the fourth quarter results due to the cancellation of bookings for quite a few days. As the majority of the cancellations occurred during one of the biggest conventions ‘SEMA’, management expects the impact on revenue to be harsh in the fourth quarter. MGM Resorts currently retains a Zacks #3 Rank that translates into a short-term ‘Hold’ rating.

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