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Trade of the Day: MGM Resorts (MGM)

The casino and resort operator is highly undervalued going into Q2 earnings


Stocks rattled purposefully around in their cage on Monday, throwing out a menacing stare to observers in the morning and grinning in the afternoon, but ultimately ended flat with a slightly negative bias. There were no major catalysts, as an air of caution appeared to prevail ahead of a full slate of economic reports, a statement by the Federal Reserve after its monthly chinwag and a busy week on the earnings calendar.

As for earnings, well, more than 40% of the S&P 500 has now reported for the second quarter. Most key metrics continued to improve. According to FactSet, the blended growth rate for Q2 S&P 500 earnings trended higher again today and now stands at 6.3%, up from 5.3% at the end of last week, the 4.9% expected at the end of the quarter and the 2.1% recorded for Q1.

The earnings-per-share beat rate pushed back up a couple of points to an above-trend 74%. In addition, companies are beating consensus earnings estimates by 4.3% in the aggregate, a full percentage point ahead of the four-quarter average. The blended growth rate for Q2 S&P revenue stood at 3.1%, unchanged over the last few days and up slightly from last week and what was expected at the end of the quarter. The revenue beat rate continued to slip from last week, but at 66% was still ahead of the 53% seen in Q1 and the four-quarter trailing average of 55%.

Cutting through the mumbo-jumbo, companies have largely found another gear and continue to surprise analysts and investors with their ability to cut costs and increase sales despite the stagnation in wage growth among consumers. Today’s trade is one such company that I expect to outperform on the strength of its Q2 earnings.

MGM Resorts International (MGM) owns and operates casinos, resorts and golf courses in the United States and China from its base in Las Vegas, Nev. The shares were clobbered during the great financial crisis of 2007-2008, and even though they have been slowly recovering ever since, they are still 80% below their peak levels. The company has a history of being underestimated, and at the moment my research suggests that earnings estimates for the spring quarter, which will be released before the opening bell on Aug. 5, are too low.

Shares were up another 1.6% on Monday, helped by positive data concerning the Macau gaming industry. MGM is one of the handful of casino companies operating in the Chinese territory that neighbors Hong Kong, and the Macau casinos just enjoyed a particularly strong week, with above-average daily table wins.

Buyers have continually swarmed into the stock ahead of its early-August earnings report. I recommend that you purchase MGM shares at current levels, as I am expecting an upside surprise going into the Q2 announcement next week.

Jon Markman operates the investment firm Markman Capital Insights. He also offers a daily trading advisory service, Trader’s Advantage, and CounterPoint Options, a service that helps individual traders make steady, consistent profits with volatility-related instruments.

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