Why MGM Resorts Has Turnaround Potential After Trailing S&P 500
- By Robert Stephens, CFA
Investing in a stock that has underperformed the S&P 500 in the last year may sound relatively risky. In the case of MGM Resorts (MGM), though, this could mean there is turnaround potential which leads to high returns in the long run.
The company is intent on building a strong position in the lucrative sports betting market, while new projects could lead to improving financial performance over the medium term. Its diverse range of operations may also make it more resilient than sector peers, while a potential move into Japan could boost its long-term profitability.
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The intrinsic value of MGM
Growth catalyst
In the last year, MGM Resorts' stock price has fallen 21%. That's a significantly worse performance than the S&P 500, which is up 17% during the same time period.
A potential catalyst for the stock price could be the company's focus on sports betting. Following the Supreme Court's decision to overturn the federal ban on sports betting, the company has signed multiple deals that could provide it with a dominant position in what may be a rapidly growing industry.
For example, it has entered a joint venture with GVC Holdings (GVC.L) that will provide access to all of the casino operators' properties in the U.S. The 25-year agreement includes online operations and could deliver high growth in the long term.
MGM Resorts also signed a deal with regional casino operator Boyd Gaming (BYD) that provides access to their respective properties to offer online and mobile gaming, including sports betting. Boyd has one of the largest sportsbooks in Nevada, with the agreement providing the two companies with a shared presence in 15 states.
The company has also signed an agreement with the NBA to use the league's data and images in its wagering. This could provide it with a competitive advantage versus rivals in what could become a crowded marketplace. Although the agreement is non-exclusive, it may provide the company with an advantage over rivals in the near term, which allows it to enjoy a dominant position in the long run.
International growth
The company's long-term financial performance could be boosted by a presence in Japan. Following the approval of a law to legalize casino gambling, three cities in Japan will be chosen to receive a license. The license will give a casino operator a near-monopoly status in the city in question, which could lead to high levels of profitability in the long run. With Japan expected to become the second-largest casino market in the world in the long run, the growth potential seems to be high. While there is no guarantee that MGM Resorts will be awarded one of the licenses, the potential for it to take place could lift its stock price performance in the medium term.
The company's financial performance is set to be boosted by the recent opening of the MGM Cotai in Macau. Similarly, the income stream from the newly opened MGM Springfield could improve profitability and cash flow in the next couple of years as it ramps up to full operating capacity. In the case of MGM Cotai, it could benefit from China's desire for an increased focus on non-gambling activities from casino operators. It is targeting the mass market, and could therefore become increasingly popular over the medium term.
Slowdown
Recent results from casino operators in Las Vegas and Macau suggest that a slowdown in growth is taking place. For example, Caesar's (CZR) revised its outlook for its Las Vegas resorts, while MGM Resorts also missed analyst expectations when it reported its recent quarterly results. Growth may also be slowing in Macau, with gaming revenues in July being 3.6% lower than at the start of the year. With the potential for a further Chinese government crackdown, the outlook for Macau could become increasingly uncertain.
While MGM Resorts has a significant presence in Las Vegas and Macau, it also has a diverse portfolio of assets elsewhere. It operates in a number of states across the U.S., with a large proportion of its revenue being derived from properties outside of Las Vegas. Therefore, it is less dependent on Las Vegas and Macau than many of its sector peers. This could provide it with a more resilient earnings outlook that may allow it to attract a premium valuation versus industry rivals over the long run.
Verdict
With MGM Resorts adopting an aggressive growth strategy in the sports betting market, the company could occupy a dominant position in what may prove to be a fast-growing sector. The potential for international growth, as well as new properties coming onstream, could lead to rising levels of profitability.
While there could be a slowdown in Las Vegas and Macau in the near term, the company's diverse asset base may provide it with a relatively resilient financial outlook. Therefore, while the last year has been disappointing for the company's stockholders, there seems to be turnaround potential on offer in the long run.
This article first appeared on GuruFocus.
Warning! GuruFocus has detected 2 Warning Sign with MGM. Click here to check it out.
The intrinsic value of MGM
