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I Put MGM Stock on a ‘Deathwatch’ for a Reason … and Little has Changed

If not the pandemic, the economy stands to cripple the casino industry

Even without the proliferation of the coronavirus from China, I found Las Vegas as purely a vacation spot. But living there? I’d find it an insufferable city. With the extreme heat and the influx of tourists, I wouldn’t do well. Arguably, though, most folks love Sin City, which invariably helps support MGM Resorts (NYSE:MGM). However, the pandemic completely changed the narrative for MGM stock.

I Put MGM Stock on a ‘Deathwatch’ for a Reason … and Little has Changed
Source: Shutterstock

Admittedly, prior to the outbreak and the unprecedented economic impact, I liked MGM stock as an outside bet. In the “old normal,” unemployment was down at multi-year lows. If anybody with some marketable skills wanted a job, they could find one. In a bull market, casino stocks — especially the discounted ones — offer a compelling look.

Unfortunately, that’s not the situation we have now.

U.S. coronavirus cases trend and forecast
Source: Chart by Josh Enomoto

I’ll dive into the economic repercussions for MGM stock later. First, investors should recognize the tough road ahead in terms of coronavirus infections. As many of my readers may know, I’ve been following infection rates for a long time. In fact, I was one of the first analysts to compare international cases based not on calendar days, but rather, on the onset of major community spread (typically, 50-100 cases).

With the latest information, I forecast that we’ll have around 500,000 cases a week from now, near Easter. More problematic, we’ll likely continue to see cases grow into May. In the meantime, we’ll witness continued strain on our healthcare system, as well as societal unrest.

Plus, even if cases stop growing, we must make sure that we’re not opening the economy prematurely. Therefore, on a net basis, the extended downtime portends a long and uncertain road for MGM stock.

Cruel Timing Hurts MGM Stock

Recently, a local Fox broadcast in Las Vegas showed a clip from a filmmaker who recorded the “post-apocalyptic” scene that has become a new normal for Las Vegas. Entitled “Coronavegas,” it truly is a surreal visual.

Indeed, just from watching the clip, you viscerally recognize the deep troubles facing MGM stock. Vegas is the place where people go to lose their inhibitions. With the alcohol freely flowing and rambunctious people egging you onto decisions that you won’t remember the next day, fronting a casino and resort is great business, so long as the traffic is there.

Based on early stats, it appears that had the coronavirus not ruined everything, Vegas was on track for a very strong year. In February of this year, visitor volume was 3.33 million, up 4.5% year-over-year. Also, convention attendance increased 1.6% to 760,300 people.

Obviously, March is going to look very different.

Not only that, the timing of the pandemic is unusually cruel. In 2019, the months of March through August averaged visitor volume of 3.63 million guests. But between September through December, this average fell to 3.53 million.

Las Vegas Visitor Volume
Click to Enlarge
Source: Data from the Las Vegas Convention and Visitors Authority

Realistically, there’s a chance that we won’t see a return to the old normal until late summer. Coincidentally, race organizers rescheduled the iconic Indianapolis 500 to Aug. 23. Frankly, I’m not sure if that’s enough time. Given the tremendous economic sacrifices that Americans have made, it would be foolish for state and local governments to prematurely lift their stay-at-home orders.

It’s better to be safe than sorry. After all, our country suffered grievously when we treated COVID-19 as “just like the flu.”

But even if we reopen everything in August, it’d be disastrous for MGM stock. The underlying company will be returning during Sin City’s soft season.

On a “Deathwatch” for a Reason

Not too long ago, I included MGM Resorts in my list of 30 stocks on a deathwatch. Typically, these negative articles tend to attract equally negative comments. So far, the response has been encouraging, if only because the bearish case for these embattled names are patently obvious.

Let’s face it. Similar to travel stocks like Carnival (NYSE:CCL) or United Airlines (NASDAQ:UAL), nobody wants to be near each other. Furthermore, casinos feature high-touch machines and throngs of people in tight quarters breathing the same recycled air. No thanks!

But even if we discount the health risks and the changes in social behavior moving forward, what about the economy? Two weeks ago, a record 3.3 million Americans filed for unemployment benefits. This past week, that number was a mind-blowing 6.6 million. And that was over one million higher than Bank of America’s worst-case estimate of 5.5 million claims.

Put another way, long after the coronavirus has faded, we will encounter perhaps unprecedented economic pain. In this environment, every dollar counts. Certainly, you wouldn’t waste it in Vegas. Therefore, I see prolonged bearishness for MGM stock.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/04/i-put-mgm-stock-on-a-deathwatch-for-a-reason-and-little-has-changed/.

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