On paper, Nevada Gov. Steve Sisolak’s plan to reopen his state is wonderful news for casino giants like MGM Resorts (NYSE:MGM), Wynn Resorts (NASDAQ:WYNN) and Las Vegas Sands (NYSE:LVS). With the nation reeling from several weeks of forced quarantines, the collective cure for the novel coronavirus has become worse than the disease.
Unfortunately, the casinos failed to respond positively to the news, with MGM stock particularly hit hard.
Despite the fundamental tailwind, many in Las Vegas are simply not ready to accommodate a full-capacity return. According to a report from the Wall Street Journal, MGM Resorts acting CEO Bill Hornbuckle “will open two or three of its casinos, including the flagship Bellagio, as part of a gradual relaunch.”
You must give credit to Hornbuckle and his leadership team. For the quarter ending March 31, the company’s net revenue declined a whopping 29% to $2.3 billion. If any company is raring to go, it’s MGM. As well, stakeholders of MGM stock are eager to see upside, or at least technical mitigation.
Yet Hornbuckle is focused on responsibly opening, even though he knows full well what that means for the casino. At the same time, the chief executive really doesn’t have a choice in the matter, as I’ll explain below. It’s a classic case of damned if you do, damned if you don’t.
Therefore, here are three reasons why you shouldn’t take the discount on MGM stock.
1. Unemployment Numbers Really Are Bad for MGM Stock
A few days ago, the Department of Labor again released sobering news. In the week ending April 25, 3.8 million workers filed for unemployment benefits. Over a six-week period, the tally of Americans filing jobless claims reached 30 million.
Based on the size of the U.S. labor force in 2019 (157.5 million), the “paper” unemployment rate is around 19%. However, as so many others pointed out, several million workers haven’t been able to access their state benefits programs. Thus, the true figure is understated.
Obviously, when you have that big of a hole in the consumer economy, the narrative for MGM stock is putrid at best. But that’s not the only concern I have.
If you listen to the mainstream media, many pundits have expressed some optimism that the rate of Americans filing for benefits has declined. Of course, this is a true statement. But as Ian Shepherdson, chief economist at Pantheon Macroeconomics notes, “Layoffs are now working their way through management and supply chains and business services.”
Further, if you look at the breakdown of the labor force, six categories pop out as the worst impacted:
- Education and health services (35.9 million workers)
- Wholesale and retail trade (19.7 million)
- Manufacturing (15.7 million)
- Leisure and hospitality (14.6 million)
- Transportation and utilities (9 million)
- Mining, quarrying, and oil and gas extraction (750,000)
Add it up and you get nearly 95.8 million workers. The worst unemployment benefits report saw over 5.2 million file claims, which represents 5.47% of the worst impacted sectors. The other sectors have a total of 61.8 million workers. Against 3.8 million claims filed, this represents 6.21% of the “least” impacted categories.
That’s terrible news for the country and MGM stock.
2. The Character of Las Vegas Has Changed
If I had to guess, I’m sure most of you have seen the film Casino. If not, here’s a spoiler alert.
In the movie’s finale, the main character laments that Las Vegas was no longer recognizable to him. Instead, Sin City became corporate, losing its raw essence. Now, I’m not sure if that was a bad thing considering the grotesque incidents that occurred in the film. Nevertheless, it’s an accurate assessment, at least in terms of visitor volume.
Stereotypically, Vegas has the reputation for wild shenanigans, most of which I cannot describe. That will always be a part of the Vegas experience. But statistically, a greater portion of Sin City visitors were there to attend conventions.
In 2019, 15.64% of visitors were convention attendees, steadily approaching the all-time record of 16.21% in 2006. As you might expect, the Great Recession put a damper on the convention industry. But the recovery period saw this figure move north once again.
Click to Enlarge
Presently, we’ve got to assume that the coronavirus will destroy the convention industry’s sentiment, just as it did in the last recession. If so, this would have an ominous impact on MGM stock.
While the wild drunken nights and the uninhibited gambling are again integral to Las Vegas, increasingly, legitimate industries have kept the lights on. And as the wave of unemployment figures impact higher-paying jobs, that necessarily means we’ll see dramatically reduced convention attendees.
Unless the casinos have a plan for that inevitability, I’d be careful about buying MGM stock right now.
3. People Just Don’t Want to Go
Finally, even with Nevada making plans to reopen, the real question is, will people come? While I don’t want to sound overly pessimistic, I highly doubt it.
When you consider that millions may have been discouraged with the slow process of receiving state and federal unemployment benefits and rescue funds, we could be talking about an unemployment rate well north of 20%. In that case, no incentive exists to spend on frivolous vacations.
Also, we must respect that consumer behaviors may be changing before our very eyes. For instance, Clorox (NYSE:CLX) is now one of the sexiest names in the markets – yes, Clorox! If you see more people waiting in line to buy disinfectant wipes rather than for a hot act at a nightclub, you know you have serious problems.
Worst of all, most Americans would prefer to shelter in place, prioritizing their health over the economy. With that kind of paradigm shift, MGM stock finds itself in an impossible situation.
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.
