MGM Resorts International’s MGM strong brand presence, solid long-term prospects of Macau business and digital initiatives bode well. However, high debt and intense competition remain concerns. Meanwhile, shares of MGM Resorts have lost 12% in the past three months compared with the industry’s decline of 23.3%.
Factors Driving Growth
MGM Resorts, one of the leading companies in the gaming and lodging industry, is well poised to grow on high brand awareness. The company’s superior business model, extensive non-gaming revenue opportunities, high-quality assets and attractive property locations are primary growth drivers.
Also, MGM Resorts aims to maximize performance in the domestic resort portfolio across all segments of its business, including hotel, casino, food and beverage and entertainment. The company believes that concerts and events could help in increasing visitation and traffic in Las Vegas. Thus, the Las Vegas business is likely to perform well on the back of an improving economic scenario and increased tourist numbers.
For its Macau operations, the company is undertaking initiatives to increase revenues and junket productivity and anticipates a positive trend buoyed by upgrades to main gaming floor products and marketing initiatives.
The opening of MGM Cotai in February 2018 significantly boosted revenues in the third quarter of 2018. Notably, revenues at MGM China improved 37% on a year-over-year basis in the quarter, courtesy of $172-million net revenue contribution from MGM Cotai. Revenues have improved in the past six quarters, after consistent year-over-year declines since second-quarter 2014.
Moreover, the company utilizes various types of technology to maximize revenues and efficiency in operations. Recently, it partnered with Boyd Gaming to significantly enhance market access and customer base throughout the United States. Thus, its continuous digital endeavors will drive margins with lesser capital spending.
MGM Resort’s high dependence on debt financing is a major concern as any severe slowdown in macroeconomic and credit market conditions can affect the company’s ability to pay or refinance its debt.
Moreover, Macau/China regulatory issues may hamper Macau’s revenue growth thereby, weighing on the company’s performance in the region. Intense competition in the industry add to the woes.
As far as valuation is concerned, we find the stock stretched compared with its own range as well as the industry average. The stock has a trailing 12-month EV/EBITDA ratio of 26.82, which is just below the high level of 28.70 scaled in a year. Meanwhile, the trailing 12-month EV/EBITDA ratio for the industry and the S&P 500 is at 19.48 and 9.91, respectively.
Zacks Rank & Stocks to Consider
MGM Resorts carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the Consumer-Discretionary sector are Liberty Broadband Corporation LBRDK, carrying a Zacks Rank #1 (Strong Buy), and Rogers Communications Inc. RCI and DISH Network Corporation DISH carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Liberty Broadband has an expected next-year earnings growth rate of 107.1%.
Rogers Communications has an expected current-year earnings growth rate of 19.6%.
DISH Network has an expected current-year earnings growth rate of 11.8%.
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