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There’s No Need to Dump MGM Stock Now, but Definitely Don’t Buy It

MGM Resorts (NYSE:MGM) is still reeling from the effects of the novel coronavirus. MGM stock is down more than 50% year-to-date as markets become bearish on the casino industry’s recovery.

There's No Need to Dump MGM Stock Now, but Definitely Don't Buy It

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One of the main troubles is diversification. Since 70% of its hotel portfolio is in Las Vegas, MGM is tied pretty heavily to the cities recovery. Competitors Caesars Entertainment (NASDAQ:CZR), Wynn Resorts (NASDAQ:WYNN), and Las Vegas Sands (NYSE:LVS) have more diversified portfolios.

In the first quarter, revenues from the Strip fell by 21% year on year and MGM doesn’t look any better internationally. MGM China reported a 63% decline, and Macau’s gaming revenue tanked by a whopping 97%, or $95 million, as coronavirus rocked the biggest gambling hub in the world.

Uncertain Times for MGM Stock

It’s tough to predict when the gambling industry will be back on its feet. Investors are scratching their heads as to whether casino companies offer any upside. Although Macau reopened for business in February, the individual visitor scheme remains suspended. This means the Chinese cannot gamble in the territory, leading to millions in lost revenue.

The company is hoping its Las Vegas properties will be humming by the start of June, but casinos may not see pre-pandemic numbers for several years to come. Rating agencies like Fitch have revised their outlook on MGM from stable to negative. In a note, the rating agency said the revision reflects “the uncertainty surrounding the duration of the closures and the subsequent recovery.”

Adding to the transitional atmosphere, in March, MGM CEO Jim Murren announced he would be leaving. This was big news, particularly since it came in the middle of a pandemic.

In that same month, MGM named COO Bill Hornbuckle acting CEO and president. Hornbuckle has been working in Vegas for more than thirty years and is well versed in the company’s operations. But even with his extensive experience it’s a tough time to lose a well-tenured corporate leader.

Murren was at the helm of several landmark deals, such as the sale of MGM Grand Las Vegas and Mandalay Bay. The disposals were part of an overall plan to make MGM an asset-light operator. The assets were sold to a joint venture between Blackstone Real Estate Income Trust and an MGM holding company.

MGM will likely continue with this strategy. At the moment, though, Hornbuckle seems squarely focused on cutting costs. He has reduced executive positions and consolidated regional management.

More notably, MGM has slashed dividend to a nominal $0.01 per share for the year. The company is also encouraging its executives to accept stock instead of cash, and half of the capital expenditures for 2020 stand deferred.

MGM Still Has Some Financial Moves

MGM has done exceedingly well to shore up its balance sheet during the crisis. It has $5.3 billion of cash in hand to support itself, having received $700 million after redeeming a slice of its partnership units in MGM Growth Properties (NYSE:MGP). MGM Resorts is the majority owner of the real estate investment trust formed in 2015. It owns 13 properties, all of which are operated by MGM Resorts.

In April, Hornbuckle revealed the company is burning through approximately $270 million a month. Assuming that the run of play does not change, considering its liquidity position, MGM can bear this cash burn even if U.S. casinos remain shuttered for awhile.

Recently, Hornbuckle wrote a letter to furloughed workers regarding the future of the industry and MGM. He maintained that the company would welcome back employees with open arms but noted that there were tough times ahead.

Hornbuckle further added that although there was an expectation that things would be on track by the summer, the timeline has changed. That’s why 63,000 furloughed staff are in danger of layoffs starting Aug. 31. The move highlights how the road to recovery for the company and the sector, in general, is long and arduous.

With travel likely to remain sluggish for the foreseeable future, it’s understandable why Hornbuckle feels this way. Until tourism and travel get back on track, the company will have to keep a tight noose around costs.

The Whole Industry Is on Edge

It’s easy to forget that in many ways, MGM stock is in a much better position than some of its peers. The company is a legacy brand, and if you’ve ever visited Las Vegas, you must have stayed at one of their resorts. That kind of brand recognition is hard to cultivate, and investors value this kind of goodwill.

On top of that, the company has leadership with several years of experience to steer them out of the crisis. It is also offering an affordable entry point to invest in an iconic brand.

However, the company is not an island onto itself, and the broader industry is suffering. Look no further than the Caesars and Eldorado Resorts (NASDAQ:ERI) merger. Initially a $17.3 billion deal, the price tag will likely change now considering all that’s happened. It’s also up in the air whether it will produce the entertainment juggernaut as envisioned previously.

Analysts will view the casino space as a risky one for the foreseeable future. That will likely weigh down on the valuations for all casino stocks, through no fault of their own, at times.

The Bottom Line on MGM Stock

MGM Resorts is an iconic brand that has made some excellent moves to mitigate the damage caused by Covid-19. The company is not in danger of insolvency and has ample cash on its books to survive the crisis and then some.

But it’s difficult to predict where casinos will be in the short term. It’s not a sell recommendation by any means since I expect MGM to bounceback and trade close to $25 in one year. But Covid-19 will have a long-standing impact on the industry and the stock, and investors may not want to remain exposed to this level of uncertainty.

MGM stock is a hold for me.

Faizan Farooque is a contributing author for InvestorPlace.com and numerous other financial sites. He has several years of experience in analyzing the stock market and was a former data journalist at S&P Global Market Intelligence. His passion is to help the average investor make more informed decisions regarding their portfolio. Faizan does not directly own the securities mentioned above.

Article printed from InvestorPlace Media, https://investorplace.com/2020/05/no-need-to-dump-mgm-stock-definitely-dont-buy/.

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