MGM (NYSE:MGM) stock should get a nice bump when its flagship, higher-end casinos open up later this month and next. These “reopenings,” as the company calls them, will help boost MGM stock because the steps will push the company toward operating with positive cash flow.
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The company had already reopened its Mississippi properties on May 25 and June 1. In addition, on June 4, it reopened four Las Vegas casino resorts: the Bellagio, New York-New-York, MGM Grand Las Vegas and The Signature. On June 11 it reopened The Excalibur Hotel & Casino.
MGM had shut down all its properties on March 17 in the U.S. On April 30, it reported 29% lower revenue from the prior year. Moreover, its earnings were negative and cash, using a measure called EBIDTAR, was down 69%. So you can imagine that earnings for Q2 will be much worse than this.
Focus on the Future for MGM Stock
Expected bad results are already discounted in the MGM stock price. What investors want to know is how much will the company make going forward.
Analysts expect MGM to produce negative earnings in 2020 and also in 2021, according to analysts polled by Seeking Alpha. However, the loss will fall to just negative 82 cents per share by 2021. I suspect that the company’s cash flow will be getting close to where it was prior to when the novel coronavirus restrictions started.
For example, in the year ending March 31, MGM produced positive free cash flow of $359 million. This more than covered the $275 million cost of the dividend payments over the year ending March. And that was even though the March quarter had negative free cash flow.
The problem though is that MGM has now cut its dividend to just a penny per share. So, it will cost will only about $5 million annually. The dividend yield is about 0.05% annually. That is nothing, almost.
What Analysts Are Saying
Barron’s recently pointed out that MGM stock has the highest exposure to Las Vegas for its revenue and earnings. Therefore, the risk is that if people do not want to travel by air to Las Vegas, the company’s fortunes could lag. Moreover, Covid-19 spreads indoors with large crowds. This fear might prevent people from gambling as they did before.
Barron’s also referred to a Credit Suisse analyst’s recent report. He said there were three risks for Las Vegas casinos: fear of travel, not enough conferences and too much supply of casinos coming online.
So there is no question that the development of a Covid-19 vaccine or even the prospect of a vaccine will move the stock. This is because when people feel that if they get the coronavirus they can get well, they will then travel. If they see light at the end of the tunnel, they will move toward it. They will become relaxed, take vacations and return to previous leisure activities.
What to Do With MGM Stock
The problem right now is that there is no dividend yield. Investors receive little income while waiting for the stock to recover. Therefore, I would wait to see what the upcoming reopening results will bring. Are the high-end casinos and resorts booking sufficient revenue for the company to turn around?
In effect, the July 4 weekend is the return of Las Vegas to full operations. Look to see how the crowds operate during that weekend to decide if MGM stock looks like a bargain. It is likely the stock will get a boost from the return to operations, especially if the crowds are bigger than expected.
As of this writing, Mark Hake, CFA does not hold a position in any of the aforementioned securities. He runs the Total Yield Value Guide which you can review here.
