Earnings season beings to wind down heading into next week, but there are still some heavy hitters left to take the stage. For instance, MGM Resorts International (NYSE:MGM) is slated to release its fourth-quarter results ahead of the open on Tuesday, Feb. 20. Wall Street is expecting a profit of 12 cents per share from the gaming stock, but declining revenues in Las Vegas and Macau could make hitting this target difficult.
Specifically, gaming revenue has been falling for the past several months. According to the most recent industry data from the Nevada Gaming Board, gambling revenue on the Las Vegas Strip fell 16% in December.
What’s more, the Chinese gambling hot-bed Macau marked its eight straight month of declining revenue in January, as revenue fell 17.4%. According to Wells Fargo analyst Cameron McKnight, February could be even worse, with McKnight lowering his forecast to a decline of between 35% and 43% year-over-year.
The negativity has greatly impacted short-term expectations in the analyst community. For instance, EarningsWhisper.com reports that MGM’s fourth-quarter whisper number arrives at breakeven — 12 cents worse than the consensus.
Still, despite the poor short-term projections, the brokerage community remains largely bullish on MGM stock for the long haul. According to data from Thomson/First Call, 17 of the 20 analysts following MGM stock rate it a “buy” or better, with three “holds” and no “sell” ratings.
Additionally, the 12-month consensus price target of $28 represents a sizeable premium of 35% to yesterday’s close at $20.75.
A poor quarterly showing from MGM Resorts on the earnings front could be enough to spark downgrades or target cuts from this bullish bunch.
Options traders are also placing sizable bets against MGM stock. Specifically, the Feb. put/call open interest ratio for MGM arrives at 1.41, with puts easily outnumbering calls among options set to expire at the end of next week. This ratio creeps higher to 1.53 when we include Feb. and March options.
Click to Enlarge Overall, February option implieds are pricing in a potential post-earnings move of about 4% for MGM stock. This places the upper bound near $21.60, while the lower bound lies at $19.90. A rally would leave MGM well short of resistance at $22, while a post-earnings plunge would put the stock back below round-number support at $20, potentially leading to heavy follow-through selling pressure as analysts re-evaluate their longer-term outlooks.
2 Trades for MGM Stock
Put Spreads: Those traders looking to jump on the bearish bandwagon might want to consider a Feb $19/$21 bear put spread. At last check, this spread was offered at 51 cents, or $51 per pair of contracts. Breakeven lies at $20.49, while a maximum profit of $1.49, or $149 per pair of contracts, is possible if MGM stock closes at or below $19 when February options expire.
Selling Calls: If betting directly against MGM stock isn’t your style, you might consider entering a Feb $25 call sell position. Such a trade is especially useful if you already own MGM stock, as it allows you to offset some of your portfolio losses in the event of a selloff, but also allows you exposure to any upside up until the stock trades at or above $25.
At last check, this option was bid at 9 cents, or $9 per contract. A sold call allows you keep the premium as long as MGM stock closes below $25 when February options expire. On the downside, if MGM rallies above $25 prior to expiration, you could be forced to provide 100 shares for each call sold, which could be quite costly if you do not have enough MGM stock on hand to cover the call.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
