3 Pros, 3 Cons on Buying MGM Resorts International Stock Today

MGM Resorts International (NYSE:MGM) had a solid 2017. MGM stock has rallied 27% over the past 12 months, and that is despite the tragic shooting in Las Vegas last fall.

And now MGM has another opportunity.

Key rival Wynn Resorts, Limited (NASDAQ:WYNN) finds itself in danger of a losing streak following sexual allegations against the company’s CEO. Their problems give MGM a big opening in a cutthroat industry. Before getting too excited though, don’t overlook MGM’s flaws.

MGM Stock Cons

Vegas Shooting: In October, Stephen Paddock committed one of the deadliest mass shooting in American history. Paddock opened fire on a large concert in Las Vegas, killing 58 people and injuring almost 1,000 before he took his own life.

Not surprisingly, tourists have been less eager to visit Las Vegas since the tragedy. MGM sharply cut its estimates for Vegas revenues in Q4. The company pared back on Vegas advertising in the wake of the attack, and acknowledged that hotel cancellations rose sharply.

And in terms of profit margins, MGM cut its EBITDA margin outlook by close to 100 basis points.

Las Vegas will bounce back. Even the December numbers weren’t that bad. Gaming revenues were flat on the month, and that’s quite solid given the tragedy. But it may take several quarters into 2018 before Vegas revenues power back up again.

Dangerous Balance Sheet: Ironically, for a gaming company, MGM’s balance sheet is quite a gamble. The company has more than $13 billion in debt, against less than $2 billion in cash. It has maintained this high debt level over the years, rather than using the current good economy to shore up its fiscal position.

This could become a serious problem for MGM stock during the next recession. MGM declined from as high as $96 in 2007 to under $2 by the depths of the financial crisis. This is the sort of risk you take holding a heavily levered business that is highly cyclical.

History won’t necessarily repeat, but do expect MGM stock to get whacked again when the economy slows down.

Expensive Stock: MGM isn’t particularly attractive on a valuation basis. The stock is trading at 36x trailing earnings, and 25x forward earnings. That is in no way cheap for a cyclical business with a massive debt load.

And MGM doesn’t have much of a moat. Casino operators are constantly building new properties. Gamers stop frequenting older resorts unless the management teams put tons of money into sprucing up their aging casinos.

MGM Stock Pros

Strong Macau Activity: Macau continues to be a booming market for casino operators. Macau’s January gaming revenues shot up an amazing 36% year over year. This torrid growth rate blew away the 27% consensus analyst estimates for the month.

JP Morgan’s analyst also suggested that Macau’s VIP gaming revenues rose a jaw-dropping 50% year over year.

So far, MGM hasn’t greatly benefited from this activity. Macau currently accounts for a modest 15% of MGM’s overall EBITDA. And MGM saw a 5% decline in EBITDA out of Macau over the past year, as new casino openings siphoned off business from MGM China. However, that is changing soon.

MGM China’s new Macau casino, the $3.4 billion Cotai resort, is set to open in February. MGM China stock (listed as ticker 2282 in Hong Kong) is up from 15 to 24 Hong Kong dollars per share over the past year, reflecting investor optimism about Macau’s market and the new casino opening.

Winning From Wynn’s Setback: Wynn Resorts’ stock has plunged over the past week. WYNN stock is down from 200 as recently as last week to just 166 now. This is due to allegations of sexual misconduct against Wynn’s namesake operator, Steve Wynn.

Normally a company losing its CEO wouldn’t provoke such a dramatic sell-off. However, Steve Wynn was pivotal in turning Wynn Resorts into a success, and investors are skeptical that the company would be the same without him.

On top of that, Wynn may lose licenses or have difficulty building out new casinos in the future as long as regulators remain focused on Steve Wynn’s alleged misdeeds. One company’s loss is often another’s win. It’s not hard to see MGM stock rising in response as one of its main rivals flounders.

Dividend Reinstated: Due to its weak balance sheet and extensive spending on new properties, MGM did not offer a cash dividend in recent years.

This changed, however, in early 2017. Given its strengthening operating position, management felt comfortable starting an 11 cent quarterly dividend. At MGM stock’s current price, the dividend yield is a modest 1.2%. A high yield income stock, MGM is not.

However, management’s willingness to pay a dividend shows confidence that business is going better. And with the payout ratio still low, MGM could easily hike its dividend again in 2018 if it so chooses.

MGM Stock Verdict

I get the appeal of rolling the dice on MGM. Las Vegas revenues should pick back up later in 2018. The new Macau casino should power MGM China’s operating results up sharply this year. And Wynn’s stumbles could be a gold mine for MGM.

But with MGM up at multi-year highs, most of this positivity is already priced in. Heavily-levered casino stocks at 25x forward earnings are simply too expensive. The odds aren’t likely to be in your favor with MGM stock here.

At the time of this writing, the author held no positions in any of the aforementioned securities. You can reach him on Twitter at @irbezek.

Article printed from InvestorPlace Media, https://investorplace.com/2018/02/mgm-stock-buying-today/.

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