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MGM Stock Looks Undervalued as Pandemic Halved the Share Price

With many gamblers visiting Las Vegas again, MGM Resorts (NYSE:MGM) recently making positive comments about its July 4 holiday weekend and a vaccine for the novel coronavirus likely to be unveiled in the U.S. by early 2021, I believe that MGM stock is tremendously undervalued.

MGM Stock Shows Signs of Life Amid Second Virus Wave Concerns
Source: Jason Patrick Ross /

Located in Henderson, Nevada, one of the Las Vegas ex-burbs, M Resort, a casino/hotel, said it was “nearly sold out” for July 4th weekend. During the first weekend that Las Vegas was open early last month, its resorts’ occupancy rate had already hit 50%. And, according to Gaming Today, Carlo Santarelli, managing director for gaming and lodging research for Deutsche Bank Securities, said “Incremental scheduled openings speak well to a ramping book of demand for Strip assets in the near term.”

On reopening weekend, the traffic of open Strip casinos fell 57% YoY. Importantly, I think it’s highly likely, for obvious reasons, that those who are coming to the Strip are hard-core gamblers, while those staying home are more likely to be casual tourists. As a result, MGM’s June revenue will likely be down far less than 57% YoY.

Further, MGM itself must have been pretty pleased with its performance during the reopening weekend; on the following Tuesday, the company announced that it would reopen two more of its Las Vegas hotels on June 25: the Luxor and The Shoppes at Mandalay Bay Place.

Finally, an MGM spokeswoman said, “demand looks strong and the properties will have good energy for the (July 4th) holiday weekend.”

Las Vegas Stocks Versus Regional Casino Stocks

In recent weeks, the shares of regional casino stocks Eldorado Resorts (NASDAQ:ERI) and Penn National Gaming (NASDAQ:PENN) have soared. Meanwhile, the stocks of Las Vegas casinos, including MGM stock, have languished.

The enthusiasm for regional casinos over Las Vegas casinos seems to be largely based on the belief that fear of flying will kill Las Vegas for the foreseeable future, while hundreds of thousands of people will drive to the regional casinos.

But there are a few problems with that argument. First, many people apparently are flying to Las Vegas; in July, domestic airlines are expected to offer more than 280 flights per day to the city. By next month, the number of flights offered is expected to only be slightly below those of each of the last few years. If many people were not buying tickets to fly to Las Vegas, airlines would not be offering so many flights to the city.

Second, many thousands of people can easily drive to Las Vegas from California, Arizona and Utah. And finally, as I’ve pointed out in the past, in my experience, Las Vegas gamblers tend to be significantly younger, on average, than those in the regional casinos. Since older people are meaningfully more vulnerable to the coronavirus than younger people, I think many of the regional casinos could actually lose a higher percentage of their customer base during the pandemic than many Las Vegas casinos.

A Vaccine Could Arrive in a Few Months

As I noted in a previous column, a vaccine developed by Oxford University proved to be safe and triggers an effective immune response in animals. And the leader of the Oxford vaccine effort says it could be ready in “early autumn.” Moreover, I pointed out that Dr. Anthony Fauci said the arrival of a successful vaccine is an issue of “when, not if.” Finally, I wrote that I was 80% sure that a vaccine would be ready by February 2021.

Given these points, MGM’s business is likely to return to normal by early-to-mid 2021. With MGM’s $6 billion of cash and no long-term debt maturing before 2022, Las Vegas’ traffic rebounding, and easy access to cash amid the Fed’s largess, MGM can easily survive until a vaccine is widely available.

The Bottom Line on MGM Stock

With the shares still down around 50% from their 52-week high , MGM’s business rebounding and a vaccine on the way, MGM is a good investment at this point.

Larry has conducted research and written articles on U.S. stocks for 13 years. He has been employed by The Fly and Israel’s largest business newspaper, Globes. Larry began writing columns for InvestorPlace in 2015. Among his highly successful, contrarian picks have been airline stocks, oil stocks and Snap. You can reach him on StockTwits at @larryramer. As of this writing, he did not own any of the aforementioned stocks. 

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