Time to Pick Up MGM at a Discount
- By Matt Winkler
MGM Resorts International (MGM) took a big hit this week after the deadliest shooting massacre in U.S. history. Shares are down 6% since Friday.
MGM is the biggest casino operator in Las Vegas and the city's largest employer. While it makes sense that the stock would tank on the news, it is unlikely that the shooting, as horrific as it was, will make much of a dent in business going forward.
Warning! GuruFocus has detected 5 Warning Signs with MGM. Click here to check it out.
The intrinsic value of MGM
At the very worst, volumes may head lower temporarily and earnings may take a slight hit. Some trips to Vegas may be canceled in the short term, tourists may get a few jitters, regular visitors may take some time off to process the tragedy, and MGM may pull back temporarily on some of its advertising for the sake of sensitivity, but none of these trends is likely to last.
The situation with MGM is the flip side of the gun stock coin. Gun stocks like American Outdoor Brands Corp. (AOBC) and Sturm Ruger & Co. Inc. (RGR) both jumped higher on news of the shooting, as tends to happen, but look at a long-term chart and there don't seem to be any major trends established by shooting incidents for gun stocks. Neither will this be the case with MGM, and the stock will continue to do what it was doing before.
Ironically, as it concerns gun stocks, the fundamental reason they tend to move following a shooting is that the fear of tighter gun control legislation spurs more buying. There is less reason for this kind of reaction now because it is very unlikely that the Trump administration will be willing to enact more federal gun restrictions because of the Las Vegas shooting. If the Obama administration couldn't do it following the Sandy Hook massacre, the Trump administration won't make any gun control moves following this one.
President Donald Trump has already failed at repealing Obamacare, and his tax reform plan isn't going anywhere so it is extremely unlikely that he will anger his base even more than he already has.
As for MGM, its next earnings date is early next month, at which point we will be able to discern the fundamental effects that the Mandalay Bay shooting had on MGM business activities. Downgrades have already been issued for the stock assuming that the shooting will negatively impact earnings, which could paradoxically bring down earnings expectations enough for MGM stock to jump strongly on any earnings beat should it happen. An underperform under these circumstances could more easily be written off by the market as a one-time hiccup due to the tragedy and not disturb the share price too heavily.
If economic conditions stay relatively unchanged by MGM's next earnings date then, now could be an opportune time to buy MGM. By next earnings, this shooting will be out of the news and out of the forefront of Las Vegas consciousness. An earnings miss will be explained away with the shooting as a footnote, whereas an earnings beat could bring shares back to where they would have been had no shooting occurred.
Disclosure: Long MGM.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 5 Warning Signs with MGM. Click here to check it out.
The intrinsic value of MGM
