More Pain Is Just Around the Corner for MGM Stock

MGM Resorts (NYSE:MGM) reports its first-quarter results April 30 after the markets close. The company already released preliminary results on April 23, so there’s not going to be too much to move MGM stock either way.

More Pain Is Just Around the Corner for MGM Stock
Source: Michael Neil Thomas / Shutterstock.com

However, what investors will want to hear from the company, is that things are going to get better and that the company has plenty of cash to cope with the slowdown both in Las Vegas, its other U.S. operations and overseas in Macau.

Would I buy MGM before earnings? I’m not sure there’s anything the company can say at this point that’s going to really hurt the stock. However, like many of the businesses affected by social distancing, business is not going to get back to normal for many months. 

What MGM investors should really be paying attention to is the tone of acting CEO Bill Hornbuckle, who got promoted to the interim CEO title in March after former CEO Jim Murren stepped down to accelerate the planned leadership transition. 

The second quarter is likely to be worse than the first. Investors will have to read between the lines during the conference call to see what the level of enthusiasm is for fighting through the novel coronavirus

In the meantime, here’s what we already know.

Business Was Down in the First Quarter

As I said at the top, MGM announced its preliminary Q1 2020 results on April 23, along with a financial impact analysis of its overall business. 

On the top line, MGM said its net revenue for the quarter declined 29% to $2.3 billion over last year. In Q1 2019, the company’s revenues increased by 13% to $3.2 billion, thanks to strong showings from both its U.S. regional operations and at its resorts in Macau, offset by flat revenues at its Las Vegas casinos. 

In the first quarter, MGM’s Las Vegas casinos and resorts saw revenues decline by 21% to $1.1 billion; its regional operations experienced a 10% decline in revenue to $726 million, and MGM China (OTCMKTS:MCHVY) saw its sales drop 63% during the first quarter $272 million due to Covid-19.

In Macau, the company’s properties reopened on Feb. 20. However, between the travel restrictions and limitations on the number of guests allowed to be at its gaming tables, the number of visits remained low throughout March. 

This highlights why investors should expect U.S. operations to witness similar inactivity once states start reopening in early May. People aren’t going to want to jump back to normal immediately. Therefore, April will be a writeoff and May and June will be down significantly over the previous year. 

As for the bottom line, the company’s consolidated adjusted property earnings before interest, taxes, depreciation, amortization and rent (EBITDAR) was $295 million during the first quarter, 61% lower than in Q1 2019. Because China was in the teeth of the coronavirus in the first quarter, its Macau properties had an adjusted property EBITDAR loss of $22 million, compared to a $193 million profit a year earlier. 

In the first quarter, MGMs U.S. regional operations and Las Vegas resorts saw adjusted property EBITDAR drop 28% and 34%, respectively. I wouldn’t be surprised if both lose money in the second quarter. 

In fact, it’s not so much if they’ll lose money, but how much. Any guidance from management (doubtful) in this regard would be helpful. 

MGM Stock and the Second Quarter

I’m going to take a stab at the top and bottom line in the second quarter for the company as a whole.

In last year’s second quarter, MGM had revenue of $3.2 billion and adjusted property EBITDA earnings of $887 million. Of that, Las Vegas accounted for 44% of revenue, Macau was good for 31%, and its U.S. regional operations chipped in for the remaining 25%.

Remember, this is a back-of-the-napkin very rough estimate of the potential drop in revenue and earnings.

So, if the first quarter had a 29% drop in overall revenue, I’ll estimate that the second quarter will see a 58% drop. Based on $3.2 million in Q2 2019 revenue, Q1 2020 sales could be just $1.3 billion.

On the bottom line, I estimate the company’s Las Vegas and U.S. regional operations will both have an adjusted property EBITDA margin in the second quarter of -8%, while MGM China would be breakeven at 0%. 

If by some miracle, I’m remotely close, the company’s adjusted property EBITDA for Q2 2020 would be -$138 million and a margin of -10.6%.

As I said earlier, the second quarter is going to be much worse than the first. 

The Bottom Line on MGM

I recently stated that if I were forced to bet $1,000 on either MGM stock or Penn National Gaming (NASDAQ:PENN), I would choose the former because it only trades at approximately four times EBITDA compared to 12 times for Penn. 

That said, if I wasn’t forced to buy, I’d take a pass on both of them given the second quarter is going to deliver a lot of hurt on the entire casino industry. 

Frankly, I could see both stocks in the low teens by sometime in June.

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.


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