MGM Stock Looks Increasingly Risky After Earnings

As states draw up timetables for businesses reopenings, investors are wondering whether now may be an opportune time to invest in the battered casino owner MGM Resorts (NYSE:MGM). Pandemic-induced travel restrictions coupled with hotel and casino shutdowns have slammed MGM stock; so far in 2020, shares are down more than 57%.

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For those who don’t already hold stake in the group, you may want to wait until we have more clarity on when the global entertainment company could reopen for business. Here’s why.

How Q1 Results Came

The MGM Resorts portfolio encompasses 30 hotels and casinos. In the U.S., venues span from Maryland to Massachusetts, Michigan, Mississippi, Nevada, New York, and Ohio. Las Vegas of course has a number of resorts, making Nevada the most important state for the group.

In China, guests can visit MGM resorts in Macau, Cotai and Diaoyutai. The group is also currently bidding for a gaming license in Japan.

Q1 started with a lockdown in China and ended with one in the U.S. According to the the American Gaming Association (AGA), as of the end of March, all 989 commercial and tribal casinos nationwide had closed their doors.

Amid the lockdown, MGM Resorts reported first-quarter results on April 30. For the quarter, revenue fell 29% year-over-year to $2.3 billion. Earnings came at $806.9 million.

Adjusted losses, which exclude gains from real estate sales, came to 45 cents per share. Last year,  earnings-per-share were 14 cents. Management also discussed the various steps it was taking to shore up the balance sheet. The group’s current cash burn rate is around $270 million per month.

Yet shares fell following the earnings announcement. On April 29, they saw an intraday high of $17.63. Now, MGM is hovering around $14.50.

What to Expect in the Rest of the Year

In the quarterly statement, acting CEO Bill Hornbuckle said it’s “still premature to predict the opening dates of our domestic properties… We are aggressively managing our cash outflows and strengthening our liquidity position to make certain that despite a lack of revenue, we are able to advance our longer term strategic initiatives such as a new integrated resort in Japan, growing our business in Macau,  and establishing a leading presence in sports betting and on-line gaming.”

Since late-March, many stocks, including MGM, have in part been buoyed by optimistic views on the effects of the pandemic on our economy.

Nonetheless, it may be important to remember that in China, Macau casinos closed on early Feb. 5 and opened their doors back again in late March. And due to that closure, analysts now expect 2020 revenues to decline by 50%. The U.S. operations are yet to open. Put another way, Q2 results that will be released later in the summer may be quite dismal too.

For now, all the Street can do is to observe and analyse various industry and company-specific fundamental numbers regularly.

It may be several quarters before management builds the business back up. In the meantime, unfortunately for current investors, the MGM share price could come under further pressure.

Where MGM Stock Price Is Now

In Oct. 2007, MGM stock had hit an all-time high of $100.50. Then in March 2009, came a low of $1.81. By Jan. 2018, the price was at multi-year highs around $38. And overall, 2018 and 2019 were volatile years.

The shares started Jan. 2020 around $34. But as the reality of the global pandemic began to resonate with MGM shareholders, on March the stock hit a multi-year low at $5.90. Since then, the price is up an eye-popping 133%.

Could it be that any potential quarterly good news from the hospitality group is already priced into MGM stock? If you also think so, then I’d encourage you to wait at least several more weeks before buying into the share price.

Are you currently an investor in MGM stock who saw gains due to the recent increase in price? Then you may want to ring the cash register and realize some of the profits. While long-term investors would like to see the price go to, and stay over, $15, short-term traders will likely keep it between $15 and $10.

Alternatively, if you are an experienced investor in the options market, you could also consider a covered call strategy with a one- or two- month time horizon. A slightly ITM covered call position with June 19 or July 17 expiry would offer some downside protection while enabling you to participate in a potential up move.

The Bottom Line on MGM Resorts

Resorts, hotels and casinos are crowded venues. In the case of a gradual opening of these venues or a second wave of the outbreak, MGM stock’s recovery may take longer than initially anticipated.

In addition, a large number of the guests who stay or gamble at these resorts would likely be out-of-state travelers or even non-U.S. residents. We do not yet know when domestic or international travel will rebound to January levels. And it may be somewhat premature to expect most people to get on the road for leisure travel as soon as restrictions are lifted.

Finding the right balance between health and economics can prove tricky for decision makers. And we do not yet know what type of an economic recovery will come, both in Macau and Las Vegas as well as the rest of the U.S. And unless visitors and neon lights return to the Las Vegas Strip and Macau soon, the rest of the year just won’t be too bright for MGM Resorts or its peers.

Especially if a global recession is already here, then the worst may not necessarily be behind for MGM stock. Therefore, I wouldn’t commit any fresh capital to this titan of the casino industry just yet.

Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, she did not hold a position in any of the aforementioned securities.


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