Like so many gaming names, MGM Resorts (NYSE:MGM) is one of notable redemption stories in the novel coronavirus reopening trade as MGM stock is higher by 40% for the month ending June 10.
As the largest operator on the Las Vegas Strip, MGM is highly levered to the U.S. economy escaping the grip of Covid-19. Last weekend, the company restarted the Bellagio, MGM Grand and New York New York on the Strip. Excalibur joined the fold on June 11 and demand is robust following a more than two-month shutdown.
MGM said earlier this week it will reopen the Luxor and The Shoppes at Mandalay Bay later this month with ARIA and the Four Seasons at Mandalay Bay welcoming players back on July 1.
In addition to Nevada, MGM runs integrated resorts in Maryland, Massachusetts, Michigan, Mississippi, New Jersey, New York and Ohio. To strong demand, the Mississippi properties restarted last month while the company’s Maryland, Michigan and Ohio venues are slated to be back online later this month.
All of that amounts to good news for MGM. After all, running casinos is a cost-intensive business and many of those costs are fixed, meaning operators are shelling out upward of millions of dollars per property on a daily basis, regardless of whether or not the property is up and running.
Second Wave Jitters
Somewhat lost in all reopening ebullience and political commotion that’s commanding so many headlines these days is that, unfortunately, the coronavirus is still with us and there still isn’t a cure or a vaccine ready to treat patients.
Although bars, casinos, restaurants and other leisure destinations are reopening with new health and safety protocols, and at limited capacity, with so many people trying to get back to their pre-virus lives, relevant fears about a second wave of Covid-19 cases are increasing.
In a Today Show interview, Dr. Ashish Jha, director of the Harvard Global Health Institute, said it’s possible that if a second wave of coronavirus cases hits, the U.S. death toll from the respiratory illness could hit 200,000 by September. A major problem for MGM and other gaming equities is that data suggests virus cases are increasing in some of the states that either did not shutdown or were among the first to reopen.
Effect is What Matters
Yes, one reason the case number is rising is because testing is increasing. And no, Nevada isn’t on the list of states currently experiencing a material jump in Covid-19 cases, but markets don’t care about cause in these types of situations. Effect is what matters and the effect of another round of coronavirus cases and fatalities would be damaging to gaming stocks, including MGM.
Investors can gauge the impact of what another batch of virus cases will look like for cyclical stocks. Markets retreated on June 11, a day in which those virus fears were amplified with MGM stock losing more than 13% on the day. In pre-market trading this morning, it was clawing back some of that loss, up 8.13%, as of 5:11 a.m. EDT.
Still, of the 15 worst-performing stocks yesterday, seven were airlines or cruise operators, confirming that the companies that were punished by the first wave of the virus are vulnerable to a second wave. Additionally, there’s anecdotal evidence out of Las Vegas suggesting another spate of coronavirus cases isn’t such a far-flung concept, including reports that mask wearing among guests is sporadic and that at least one unidentified casino isn’t doing so well on the social distancing front.
Get too many of those reports and an uptick in cases and state regulators may be left with no choice but to step in, forcing operators to reduce capacity or worse.
Bottom Line on MGM Stock
It’s not all doom and gloom for MGM stock investors. At the end of the first quarter, the company had more than $5 billion in cash, giving it its strongest balance sheet in more than a decade and the ability to stay afloat for 18 months in a zero revenue environment. Additionally, it has some levers to pull to raise additional capital, if needed, that don’t include going to debt markets.
A cash hoard like that is advantageous in this environment, but the near-term outlook for MGM boils down to the ability of the gaming industry to reopen properties, lure tourists back to those venues and hope that the U.S. can ward off another round of coronavirus cases.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.