Can MGM Resorts Stock Reach $50 Again? It’s Likely Eventually

MGM Resorts (NYSE:MGM) stands out from some of the other casino operators with resilience factors that distinguish it from the pack. It looks like a champion within its segment, and having traded down while also benefiting from some nice value catalysts both in 2021 but also as some key assets mature, we think that it could trade at $50 again once reopening sentiment can make its way into markets over recession fears.

What Should Investors Know About MGM Resort’s Business Model

In the last decade, the company was an owner operator. In the last couple of years it has transitioned itself into being an operator only, selling some of its assets to Blackrock in these last couple of years like the Bellagio, or letting it stay in their separated REIT, in order to make their business more capital lite. Its exposures are to the Las Vegas Strip, regional US operations and to Macau. Macau has been a weak point and will continue to weaken as China imposes COVID-19 restrictions. The other thing that investors should be concerned about is China noting the fact that Macau gambling causes a good deal of capital outflows due to the foreign operators, mitigated by substantial gaming taxes that might have to be brought back slightly to help operators during the government clampdown on COVID. China accounts for about 7% of the overall business by revenue, producing negative EBITDAR.

The Las Vegas Strip business on the surface is experiencing massive growth, but this is somewhat an illusion. Be aware of a recent transaction that moved the MGM CityCenter stake from being an equity accounted holding to a consolidated entity upon purchase of the 50% remaining minority shares. This caused all the growth in the business, where fundamentally the previously held assets are recovering to pre-COVID levels, even exceeding 2019 levels thanks to reopening and the resurgence of convention and tourism revenue which are the markets that MGM Resorts is skewed to serving in this geography.

Finally are the regional assets. Regional gaming is more resilient than the gambling you’d know from the movies, and is usually more stable and profitable from a state tax and regulation point of view, where their mutual benefit and symbiosis is more apparent. Regional gaming operations account for about 33% of the business by both sales and EBITDAR owing to its higher margin than Las Vegas Strip gaming which gets dragged down by leisure and tourism economics. These are the assets that can most easily outlast a recession, even quite a severe one, and benefits from better operator bargaining power and more barriers to entry.

MGM’s competitors in Las Vegas aren’t what they once were. Las Vegas Sands (LVS) and Melco Resorts (MLCO) are far more exposed to Macau and much more risky especially when considering leverage. LVS’ asset sale of Las Vegas assets has salved their wounds but leverage is still a concern, although less so with Melco which has twice the leverage and really needs to get its Cyprus assets going. MGM is already much less risky and has achieved greater value creation.

Valuation

Valuation is interesting here. Let’s start with the value creation catalyst that comes from the CityCenter acquisition. The company acquired the remaining minority stake in CityCenter valuing the entire asset at around $4.2 billion. As per their capital lite model, they also sold the real estate to continue operating it to Blackstone for $3.9 billion. These CityCenter assets contribute around $600 million in EBITDAR annually, and therefore the operations without the real estate have been valued at 0.5x, which is extremely low. Additionally, the whole business trades at a low valuation. Based on the growth we’re seeing from consolidation of the two resorts, the Vdara and the Aria, the growth in analyst forecast EBITDA from 2021 into 2022 forecasts is mostly explained, with a final 10% growth reflecting recovery progress. We think these analyst estimates meaningfully undersell the business, still providing forward multiple of 4.35x on EBITDAR. This is cheap for a reopening play that avails of 33% resilient regional exposures. The multiple also ignores that BetMGM will start coming online as a contributor this year, and has as much as $500 million in EBITDA contribution potential. While the BetMGM contribution is not online until later in the year, with reopening inevitable it appears the market is ignoring these benefits.

While there are risks, including a resurgence of COVID-19, which is likely to motivate closure of Las Vegas casinos if deemed serious enough and if the economy can afford it, the valuation provides a margin of safety. Moreover, reopening is a forgotten treat that has gone ignored as markets price in recession problems. As such, we think it’s a worthy exposure.

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