When the year started, the prospects for MGM Resorts (NYSE:MGM) did look bright. With the economy strong, there was continued momentum in revenues and profits. But of course, with the novel coronavirus, MGM stock would quickly go into a horrible downward spiral. Note that the price went from $34.50 to $7.
Yet as the overall markets went suddenly in the rally mode, MGM has been able to stage an impressive recovery.
Currently, the shares are trading at $16, putting the market cap at $8 billion. Other casino operators like Wynn Resorts (NASDAQ:WYNN) and Las Vegas Sands (NYSE:LVS) have also been posting strong gains, although nowhere as powerful as the rally in MGM.
So with the valuation cut in half for the year for MGM stock, might there still be an opportunity here for investors? Is this the start of a durable bull move?
Well, I would actually be cautious right now. While the move on the downside was probably an overreaction, so has been the recent move on the upside.
There are definitely silver linings for MGM stock. Keep in mind that during the past couple of years the company has been monetizing its real estate assets, such as for the Bellagio, Circus Circus, MGM Grand and Mandalay Bay. The result is that the company has raised quite a bit of the cash and has been aggressively reducing its debt load.
Currently, there is $3.9 billion in the bank (this includes the $1.5 billion that was drawn on the revolving credit line). And yes, management is taking swift action to restructure its operations to deal with the new reality.
It certainly helps that about 60% to 70% of the domestic properties have variable operating expenses. But the company is also scrutinizing its fixed property and corporate expenses to drive down costs. There is even a plan to defer a third of this year’s capital expenditures.
In fact, MGM does not plan on taking bailout funding from the federal government, which is a sign of confidence. Although, there may ultimately be a need to get some back-up guarantees to help with future borrowings.
Bottom Line on MGM Stock
During the past week, there have been encouraging developments with the coronavirus. There is more evidence that social distancing is starting to flatten the curve, but is still not clear when there will be an “all clear” signal.
What’s more, even when this happens (which will hopefully be soon) it will probably take time for things to get back to some level of normalcy. Understandably, there will be many people who will want to avoid getting on a plane and even more reluctant to go to Las Vegas for a gambling trip.
Another issue is the conference and events business, which is a major source of revenue for casinos. This activity will probably be slow to return as well. These events take planning and there will be lingering concerns that there could be a “second wave” of the coronavirus.
Thus, when it comes to MGM stock, it seems reasonable that business will be depressed for quite some time. And besides, the shares have already had a major surge. So for now, it’s probably best to hold off on a purchase.
Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence Basics, High-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s. As of this writing, he did not hold a position in any of the aforementioned securities.