Fears over the global impact of China’s weakening economy have triggered a horrendous start to 2016 for U.S. stocks. While many stocks are indirectly impacted by China, the fate of MGM Resorts International (MGM) stock is directly tied to China’s Macau gaming market.
MGM Stock: The Bear Case
There’s no question that MGM stock bears have plenty of arguments to support their thesis. The Macau government’s corruption crackdown and the threat of a city-wide smoking ban have driven away precious VIP gamblers and sent shares of casino operators MGM, Melco Crown Entertainment Ltd (MPEL), Wynn Resorts, Limited (WYNN) and Las Vegas Sands Corp. (LVS) reeling over the past two years. Macau’s gaming revenue has declined year-over-year for 19 consecutive months, and December’s 21.2% decline indicates that there’s still no evidence of a bottom.
In terms of value, even though MGM stock is down more than 30% from its 2014 highs, it still sports the highest forward P/E of the group. At 30.9, the current ratio is near the bottom of its recent range, but the stock still appears to offer the worst value of the Macau names.
In addition to its relatively low valuation, MGM is also the only U.S.-listed Macau operator that pays no dividend whatsoever, so shareholders haven’t even been rewarded for their patience as the company tries to regain its footing.
Continuing with the “worst in breed” theme, despite making significant reductions in 2015, MGM’s debt-to-equity ratio of 2.17 is also the worst among its three Macau peers. MGM has borrowed heavily to help fund the construction projects like its $1.3 billion MGM National Harbor resort in Maryland and its $3 billion MGM Cotai resort, both expected to open by the end of 2016.
Finally, after a (puzzling) push by shareholders, MGM stock finally caved to pressure to form a REIT to hold 10 of its casinos’ real estate. The idea behind this move is that it will somehow unlock the full value of MGM’s assets, but there seems to be little evidence that will be the case. MGM will be following in the footsteps of U.S. regional operator Penn National Gaming, Inc (PENN), which spun off its real estate assets into REIT Gaming and Leisure Properties Inc (GLPI) in 2013. The results speak for themselves.
If anything, MGM will no longer have the real estate as collateral in the future when it comes time to borrow to invest in new resorts.
The Bull Case
Market fears over China seem to be a bit overblown at the moment. U.S. stocks sold off violently to start off the year, but the latest projections from Morgan Stanley indicate only a 20% chance that the U.S. will experience a recession this year.
In addition, Stifel recently projected that China’s economic growth will stabilize “around current levels” in 2016.
For traders that believe these optimistic projections and are looking for a way to dip their toes into the Macau market, MGM stock offers the least direct exposure to Macau of any of the four U.S.-listed Macau operators. That diversity is one of the reasons why MGM stock has outperformed the other three names throughout Macau’s decline. The stock offers investors plenty of exposure to the relatively stable U.S. gaming market.
It’s hard to argue from a value perspective that MGM stock is the best Macau offering of the four. However, in the near-term, MGM is the safest way to take a gamble that the bottom is nearly in for China and Macau without risking the exposure of the more pure-play names.
As of this writing, Wayne Duggan was long WYNN and MPEL.