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Why MGM Resorts Has Recovery Potential

- By Robert Stephens, CFA

An increasing focus on efficiency could lead to a successful turnaround for MGM Resorts International (MGM). The casino and resorts operator is investing heavily in changing its business model in order to reduce costs and optimize its resources.

It is also becoming increasingly innovative as the prospect of gaining entry to Japan's lucrative casino gaming industry could enhance its long-term outlook.


With the company seeking to become more balanced in terms of diversifying its operations, it could outperform the S&P 500 after declining 20% in the last year versus a 4% rise for the index.

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Increasing efficiency

MGM Resorts is investing heavily in increasing its efficiency, which could lead to higher profitability in the long run. As part of this initiative, it is seeking to use resources across its food, beverage and entertainment offerings more effectively through setting higher prices during times of peak demand. It is also planning to reduce stock keeping units in its hotel and food and beverages offerings in order to improve margins.

The company is making major changes to its operating model with the goal of centralizing a wide range of functions that have previously been carried out at the local level. It has established 18 "centers of excellence" that will set the strategy and standards for its casino, hotel, food and beverage operations. It will also perform market research and use analytics to determine an optimum use of resources and pricing.

The end result of shifting decision-making to these centers will be staff cuts. MGM expects to reduce headcount by 1,000 before the end of the second quarter, which will improve its competitive position versus rivals. In addition to lowering labor costs, a centralized approach will allow staff members at MGM's locations to focus on serving customers, rather spending their time considering strategic changes. This could improve the customer experience and lead to increased levels of loyalty.

Growth strategy

The company is seeking to increase its focus on innovation in order to better differentiate itself from peers. For example, it opened the Mansion Villas at MGM Cotai last quarter. The addition has resonated with premium mass players who had not previously stayed at Cotai, with them also staying for longer periods than expected. Alongside further planned development of white space at its resort in Cotai, MGM Resorts' increasingly high-end range of amenities are due to support growth in the highly profitable VIP and premium mass business.

MGM continues to have the potential to win one of three gaming licenses in Japan. It is focusing on Osaka, which is the only city in Japan to indicate it wants a resort and casino. As part of its campaign to gain a license, the company has formed a consortium that will seek to work alongside Japanese companies in order to increase its chances of a successful bid. With the Japanese casino gaming industry expected to be worth up to $40 billion annually, it could catalyze the stock's performance over the long run.

Threats

The recent performance of the company's Las Vegas operations has been mixed. It recorded a 13% decrease in Las Vegas Strip casino revenue, with table games volume down 7% versus the prior-year quarter. With the wider industry reporting a 4% decline in gaming revenue across the Las Vegas Strip in the first quarter, MGM's lack of international diversity could hinder its performance versus sector peers.

Although MGM Resorts relies on Las Vegas for 44% of its revenue, it is seeking to build a more balanced business that has increasingly diverse income streams. For example, it has ramped up its operations in Springfield and Park MGM, while also recently adding Empire City and Northfield Park to its portfolio. This strengthens its regional footprint, while further investments in its Asian operations could help it to capitalize on demand from the region.

Outlook

MGM Resorts is expecting to increase earnings per share by 60% in the next fiscal year. With a forward price-earnings ratio of 25, the stock appears to offer good value given its growth prospects.

With further investments expected to make the company increasingly efficient, it could enjoy a competitive advantage that boosts its profitability.

The prospect of gaining a gaming license in Japan, as well as an increasingly innovative strategy, may lead to an improving financial outlook for MGM.

After underperforming the S&P 500 over the last 12 months, the stock appears to offer recovery potential.

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This article first appeared on GuruFocus.