The global casino industry was amongst the hardest hit businesses by the novel coronavirus pandemic. Gaming stocks have taken a pounding in the past few months, along with the consumer discretionary sector. MGM Resorts International (NYSE:MGM) shed 80% of its value between mid-February and mid-March despite having the least exposure to the “Gambling capital of the world” in Macau.
However, with the easing of lockdown restrictions in the U.S. and casinos opening up again, MGM stock is up 20% this month.
Despite the positives of late, there some good reasons to believe that a great deal of pessimism still exists in the industry. For starters, things aren’t what they used to be, as the enhanced medical protocols have taken a lot away from experience.
Although Macau has opened up, its mandatory two-week quarantine period for travelers and strict protocols has travelers considering other options. Finally, the recent spike in the coronavirus cases has sparked fears of a second shutdown in the US. Therefore, MGM’s risk/reward profile remains relatively bearish at his stage, especially with the rising Covid 19 cases in the country.
First Quarter Performance and MGM Stock
First-quarter results for MGM were poor, considering its adjusted property EBITDA in Macau accounts for 22%, which is significantly lower than its peers. Revenues declined 29.1% to $2.25 billion due to the crippling effects of the pandemic.
However, the company witnessed a massive increase in profits, mainly driven by the $1.5 billion gain related to the sale of its MGM Grand Las Vegas and Mandalay Bay properties. The increase helped the company in comfortably beating analyst expectations of a loss of 17 cents per share. However, if we exclude the gain, the company is generating a loss of $0.45 per share.
On a more positive note, its balance sheet numbers are impressive, with a cash balance above $11 billion. The massive increase in the cash balance is naturally because of the sale of its two properties, which generated $6.9 billion in cash. The company also has $1.4 billion of additional liquidity upon the redemption of its operating partnership units in MGM Growth Properties.
MGM also announced that it would be cutting its dividend to maintain as much flexibility as possible and re-invest the savings in its business. Therefore, it is clear that the company has been effective in maintaining its liquidity position and will continue to maintain its financial flexibility for the foreseeable future.
Downside Risks
Several risks exist in the current economic climate, especially with regards to the casino and other consumer discretionary sectors. It’s dumbfounding to consider the visitor arrival statistic for the first quarter in Macau, which is down 68.9% on a year-over-year basis.
Though it has opened up again, China is still maintaining its strict travel restrictions, and travelers are required to undergo two-weeks of mandatory quarantine. This is perhaps why the mass market gamblers are skeptical of visiting Macao at this time.
However, things are much different on U.S. soil, as the medical protocols are comparatively less stringent in the US regional markets. Social distancing protocols are being enforced, including cleaning stations, Plexiglas sneeze shields between seats, and improved cleaning measures for the staff and customers.
There is no mandatory quarantine requirement, which will benefit MGM and other companies in the industry to gain traffic again. Nevertheless, don’t expect things to bounce back so quickly. For instance, there aren’t any major events taking place in Las Vegas, which would draw visitors. At this point, it’s more about focusing on the basics than anything else.
On top of that, health experts are warning of a possible second wave of coronavirus. In the U.S., 21 states have recently reported a spike in daily cases week-over-week. Moreover, 79 new cases were reported in Beijing last week. However, several experts, including Dr. Anthony Fauci, the director of the National Institute of Allergy and Infectious Disease, believe that the loosened lockdown restrictions and the lax attitude of people are the main reasons for the recent spike.
Though it’s partly true, it’s still difficult to rule out a second wave at this stage. We will have more information on a potential second wave in the upcoming weeks.
Looking Ahead
MGM’s lack of exposure towards Macau could benefit its short-term results compared to its peers. For that to happen, though, the U.S. needs to remain open while the Asian markets, including Singapore and China, should remain cautious.
The second-quarter results though look bleak overall, considering the pace at things are opening up in the US and the eagerness of the consumer. Assuming 50% capacity in the US, revenues would still drop 85% year-over-year.
MGM’s balance sheet provides it the edge over its competitors. It has no long-term debt maturing before 2022, which means it has enough liquidity to last till 2021. It can also raise additional cash due to its relatively strong financial flexibility.
As it stands, it appears as if the Asian markets will struggle to return to normalcy within the next few months, at least, the opposite of which is the case in the US. However, a lot depends on the number of coronavirus cases in the upcoming weeks, which could potentially result in another lockdown.
Final Word on MGM Stock
Though MGM’s geographical exposure is a plus in the short-term, the uncertainty surrounding the coronavirus situation makes it a risky bet at this stage.
If the potential second wave is a reality, it could lead to another lockdown, thereby crippling the recovery efforts of the casino industry. Therefore, I feel it’s tough to invest in MGM stock at this point; however, it would be best to hold on to it to see how things play out in the next few months.
As of this writing, Muslim Farooque did not hold a position in any of the aforementioned
securities
