The Real Reason You Should Avoid MGM Resorts

When the novel coronavirus first reared its ugly head in the U.S., some investment sectors were obvious candidates to avoid. One of them of course was MGM Resorts (NYSE:MGM). Although the company has a broad gaming and resorts portfolio, it’s a Las Vegas powerhouse. And going to casinos – or being anywhere near large crowds – was simply out of the picture. Thus, we saw an ugly implosion of MGM stock.

mgm stock
Source: Michael Neil Thomas / Shutterstock.com

However, low prices tend to attract discount bin speculators, no matter what the circumstances. And for some time, MGM stock rewarded these intrepid contrarians. From March’s closing low to the post-pandemic closing high so far, shares more than tripled. Further, as states began reopening, several economic powerhouses including Las Vegas steadily came back to life. As a result, we saw competitors like Caesars Entertainment (NASDAQ:CZR) and Wynn Resorts (NASDAQ:WYNN) also swing higher on the enthusiasm.

Then, a stunningly positive May jobs report confirmed the optimistic argument. With the economy adding 2.5 million jobs, this suggested that the worst is behind us. Further, the employment picture repudiated warnings about doom and gloom.

However, MGM stock lost some of its sheen when a few days after the report, the government reported that 1.5 million workers filed initial jobless claims for the week ending June 6. Though benefits backlogs represent some of this tally, that claims continue to number in the millions indicates that the economic pain is spreading across multiple job sectors.

And just before the latest read on unemployment, Federal Reserve Chair Jerome Powell warned that we still have “a long road” to recovery. Naturally, this poured cold water on MGM but it’s not the most critical headwind.

MGM Stock Is Now Stymied By a Fateful Decision

Although MGM is perhaps best known for its iconic MGM Grand resort in Las Vegas – replete with multiple dining and entertainment options – its business structure is more geared toward hosting big industry meetings and conventions.

In 2016, MGM Resorts vice president of global business sales, Chris Meyer, stated that 75% of his employer’s revenue is non-gaming related. Personally, I found that to be a surprising allocation. However, conventions and other non-gaming endeavors are really the future of Las Vegas.

In an interview in October of 2019, Meyer, when referencing Sin City’s push toward the convention industry, remarked:

…in Las Vegas, not every room is occupied by groups and that calculation is further skewed when you consider the size. A boutique hotel here has 800 rooms, which might be the largest hotel in town in some places. The bottom line is we don’t have enough conference space. Groups are being forced to leave as they outgrow the space.

That is why we are actively investing in the meetings event business more than any other destination in North America. Just the expansions you mentioned total some $1.6 billion. That is a large investment in our community.

According to data from the Las Vegas Convention and Visitors Authority, convention attendees accounted for 15.6% of all Las Vegas visitors between 2017 through 2019. Therefore, the move to accommodate this trend is huge for MGM Resorts and by deduction, MGM stock.

Las Vegas total visitors vs. convention attendee ratio
Click to Enlarge
Source: Chart by Josh Enomoto

That is, unless a pandemic roils your plans.

Sadly, the incredibly smart decision that MGM’s management team made by pivoting toward an increasingly relevant business has turned into a disaster. That’s no fault of the company. But it’s painfully ugly for MGM stock.

Yes, gamblers might visit Sin City. But that’s no longer MGM’s forte.

When Will Conferences and Conventions Resume?

In February of this year, convention attendees represented nearly 23% of total visitor volume in Las Vegas. Further, this was a 1.6% and 4.5% year-over-year lift in the two categories, respectively. While you don’t want to judge based on very early results, it appeared that MGM stock was on course for a very robust year were it not for the coronavirus.

Now, I’m very hesitant on shares. In order for the underlying company to get back on track, it must start attracting convention attendees. But when will major corporations feel comfortable enough to send their employees to Vegas?

In light of rising coronavirus cases, it’s an uncomfortable but necessary question to ask. Frankly, I doubt that companies are willing to risk potential liability issues if they send their workers into a hotspot.

Additionally, companies like Zoom Video Communications (NASDAQ:ZM) have proven that many corporate functions can be performed remotely. And this plays into corporate America’s decision-making process, given that remote conferences are far cheaper than physical ones.

Apparently, we are an adept bunch. But this is also a big negative for MGM stock.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2020/06/the-real-reason-you-should-avoid-mgm-resorts/.

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