MGM Resorts International (NYSE:MGM) is a leader in casino resorts around the world, but competition from more adroit competitors and slow growth in China could create headwinds for investors. Here are three reasons to be wary of MGM stock right now.
MGM Stock Faces Problems in Vegas
The casino capital of the United States was hit hard by the 2008 recession. And although tourism and gaming revenues have increased, they haven’t reached the levels of the pre-recession glory days.
Even after a four-year uptick, gaming revenue in 2014 declined in the region.
What’s more is that MGM gets 50% of its revenue from Las Vegas interests, so a slower gaming market could mean staggered growth for MGM. The gambling industry as a whole is down when compared against the S&P 500, but MGM has fared worse than some of its competitors.
Consider that in the fourth quarter, Melco Crown Entertainment Ltd (ADR) (NASDAQ:MPEL) was down 5% and Las Vegas Sands Corp. (NYSE:LVS) 8%, while MGM was down 12%. Wynn Resorts, Limited (NASDAQ:WYNN) was down 17%, and saw its revenue drop by 26% last year and net income fall by 53%. LVS and MPEL were also in the black for the same time period, while MGM recorded a loss of $20 million.
Global Competition Hurts MGM
With its new Resorts World Las Vegas expected to open its first phase this year, it’s not a question of whether MGM will lose a share of the gaming market but by how much.
Resorts World Las Vegas is expected to be a $4 billion, 87-acre resort with diversions ranging from gambling to an indoor waterpark to a panda preserve. Some analysts think the resort, spearheaded by Genting Malaysia, could be a game-changer for MGM in Las Vegas.
MGM’s interests in China’s Macau region are also fighting for market share. Macau is the gambling capital of the world, its gaming revenue far outpacing that of Las Vegas. And in light of this, several gambling companies are scheduled to add to the region’s 30-plus casinos, including Wynn, Las Vegas Sands and Melco Crown Entertainment.
MGM’s Problems in China
The MGM Macau is a 35-story hotel and convention center with private gaming rooms, a casino and 600 rooms and suites. And MGM is betting that its flagship property in Macau will be a success. However, China’s growth in 2014 was the slowest it’s been in two decades. And as goes China, so goes Macau.
Macau saw a decrease in its casino revenue for the eighth consecutive month. And some wonder if the decrease will be exacerbated by China’s new anti-smoking policies, apart from the country’s slowed economic growth. China’s anti-smoking policy went into effect in October 2014 and prohibits smoking on main casino floors in Macau.
So while MGM has several projects under construction — including properties in Las Vegas, Maryland and the Cotai Strip, a section of Macau known for a proliferation of hotel-casinos — the question remains whether the American and Asian gambling markets will see enough of a resurgence to make those projects profitable.
As of this writing, Will Emerson did not hold a position in any of the aforementioned securities.
