[Editor’s Note: This article was updated on July 6, 2020, to clarify the status of the Borgata.]
After staging a convincing uptrend between March 2020 low and a “top” at over $23 on June 8, MGM Resorts (NYSE:MGM) resumed its fall. MGM stock bullishness relies heavily on a sustainable and measured re-opening of its properties.
The company’s mask policy at all U.S. properties is potentially a reaction to the alarming increase in cases of the novel coronavirus. But what might MGM do? If Americans visited more bars and restaurants and got infected, various states must roll back the reopening.
Despite an expected slowdown in visitors to its casino and resorts, MGM will strike a practical balance between maximizing the safety of staff and customers and growing visitor volumes.
Positive Catalyst for MGM Stock
MGM’s nationwide mask policy will require all its guests and visitors to wear a mask. It is making no exceptions. The company said in a statement that “we hope that our guests will do their part to help the collective efforts to curtail the spread of the virus. Guests who do not wish to comply will be asked to leave the property.”
The downside of the policy from a business perspective is that those who smoke and drink while gambling may not do so. But as attitudes about the danger of spreading the virus change, customers will appreciate the new rule and will comply.
The safer they feel and the more responsible everyone is, the more likely customers will come back to MGM Resorts.
On July 2, New Jersey allowed Atlantic City’s casinos open at 25% capacity. While MGM’s Borgata is waiting for a few other allowances before opening its doors again, this represents a light on the horizon.
Fair Value of MGM Stock
According to simplywall.st, MGM’s fair value is $50.62, based on its future cash flow. Analysts forecast an earnings loss in 2021, far below the profits earned in the last fiscal year.
By mid-2022, revenue will stage a u-shaped rebound, with earnings returning to positive territory in two years.
Wall Street analysts are far more conservative with their price target. Ten of the 14 analysts rate the stock a “hold.”
MGM’s future value ultimately depends on the government allowing the casino to operate at a higher capacity. That will not happen in the near term, though. The coronavirus cases are on an uptrend again, so raising capacity levels are unlikely for the next two to four weeks at minimum.
The uncertainties ahead may increase the selling pressure. This could lead to a break in the uptrend that the stock enjoyed in the mid-March to June 2020 period.
Opportunity
The drop in the stock price of MGM increases the discount on its fair value. Yet on a relative valuation basis, MGM is higher than its peers. For example, take the following metrics below in a multiples valuation: EBITDA model.
| Metrics | Range | Conclusion |
| Selected LTM EBITDA Multiple | 10.4x – 12.8x | 11.6x |
| Selected Fwd EBITDA Multiple | 16.9x – 20.7x | 18.8x |
| Fair Value | $10.17 – $16.57 | $13.37 |
Data courtesy of finbox
Even at multiples in the double digits, MGM shares are only worth around $13.
Investors willing to blindly bet on a steady increase in customer capacity may invest in MGM now. Those who want to wait it out will want to watch the stock for now.
The closer the U.S. and the world get to beating the pandemic, the higher MGM shares will bounce back. That might take a while longer.
If you are a buyer here, be prepared to hold the investment for at least a year or longer to get rewarded.
Disclosure: As of this writing, the author did not hold a position in any of the aforementioned securities.
