Surprising exactly no one, when the novel coronavirus first began imposing its weight on the U.S. economy, casino and entertainment centers like MGM Resorts (NYSE:MGM) absorbed the brunt of the damage. Due to nationwide shutdowns and shelter-in-place orders, Las Vegas and other entertainment meccas turned into ghost towns. Further, with the Covid-19 pandemic again rearing its ugly head, MGM stock seems destined for volatility.
But so far, shares have performed relatively well. True, MGM stock did shed significant value following its June peak. Nevertheless, since the March doldrums, the underlying company has defied bearish expectations of a cataclysmic implosion, instead charting a bullish trend channel. Better yet, there’s some fundamental justification for this uptick in demand.
Notably, CNBC reported that MGM Springfield in Massachusetts is finally reopening. Of course, strict measures are in place, emblematic of our new normal. For this casino, what this looks like is a maximum occupancy capped at 25%, set by the Massachusetts Gaming Commission. Though severe, the obvious encouragement is that the entertainment center is allowed to open at all.
Further, the occupancy cap may not necessarily spell immediate doom and gloom for MGM stock. Penn National Gaming (NASDAQ:PENN) CEO Jay Snowden caused a stir when he stated that his company “could break even at roughly 25% to 30% of pre-pandemic revenue.” If so, that augurs well for the rest of the gaming industry.
Also, according to a GLS Research survey in 2016, 85% of visitors to Las Vegas – MGM’s home market – earned a household income of $40,000 or more. Stated differently, most gamblers tend to make a decent living. And it’s this demographic that has best weathered the coronavirus storm due to remote work options.
Not All Is Well With MGM Stock
Still, despite the positives, the Vegas-driven casino industry has problems that investors should be aware of. And these headwinds have caused MGM stock to slow down. For example, shares are negative for the trailing 30 days.
Primarily, the biggest concern I have is consumer/visitor sentiment. While Sin City made headlines when it reopened its doors, customers only came back robustly for the initial celebrations. Now into July, key measurements for demand, such as foot traffic, are still down significantly on a year-over-year basis.
According to Earnest Research, “In aggregate, foot traffic to Nevada casinos remains down 60% YoY, and while still improving, the data is seeing growth plateau.” Also, “Smaller regional casinos have nearly bounced back, while the larger resorts on the [Las Vegas] Strip are recovering much more slowly.”
The research and analytics firm concludes that the “implication is that locals are visiting casinos, but few out-of-towners are travelling to Vegas to visit and stay at the larger casino brands. This is further corroborated by LAS [McCarran International] Airport foot traffic, which while recovering modestly, remains down 80%+ YoY.”
To corroborate the above analysis, I compared Las Vegas automotive traffic to year-ago levels. According to data from TomTom.com, Sin City saw a sizable improvement in traffic prior to its reopening. But over the last three weeks, traffic rates are down 61% YOY.
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Thus, it’s hard to imagine how MGM stock will rise on such reduced levels. Also, the rising cases of the coronavirus are not helping.
Based on the GLS Research survey earlier, 29% of Vegas visitors are from California, the most from any state. But with the Golden State essentially back on lockdown, MGM Resorts could suffer a disproportionate impact relative to non-Vegas casinos.
Convention Business Models Will Start Hurting
Another interesting stat from 2016 is that “47 percent of visitors said the primary purpose of their trip was vacation or pleasure, down from 50 percent in 2011.”
Under a bull market – or any non-pandemic impacted market for that matter – you’d probably like to see more business and commerce-related visitors as opposed to vacation-goers. Typically, business travel implies big conferences, corporate dinners and at least mid-tier hotel rooms. And this aligned with the transition of Las Vegas from an exclusively party town to one that could also be serious (and seriously profitable).
Unfortunately, this narrative has come under fire because of the pandemic. First, with businesses suffering huge costs, they’re unwilling to spend money for travel. Second, what’s the point? Since everyone has adapted to the new normal of teleconferencing, the business side of Sin City has sharply declined.
While I acknowledge the encouraging signs for MGM stock, in my opinion, the negatives outweigh the positives. Therefore, I would wait this one out until consumer sentiment provides strong evidence of a substantive recovery.
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.
