The reopening of Las Vegas last month made investors bullish on MGM Resorts (NYSE:MGM) stock. But, with a rise in new novel coronavirus cases, a rapid comeback for this casino giant looks questionable.
The company is taking proactive moves to ensure safety, like requiring masks in public places on its properties. But that may not be enough to reassure potential visitors to its Las Vegas and regional hotels. With just 36% of Americans comfortable riding on a plane, Vegas casinos are going to have a tough time filling up hotel rooms and getting people to their gaming tables.
So what does that mean for MGM stock in the near-term? Expect today’s uncertainty to continue. Yet uncertainty may be good when it comes to making money with this stock.
If MGM’s near-term prospects were brighter, its shares would be trading closer to their pre-pandemic price levels. In other words, their risk/reward ratio would not be very favorable. But, as the shares move lower, investors’ odds improve.
I’m not saying that the shares are a screaming buy at today’s prices. But if the shares creep down to $10 and below, consider the stock a strong bottom-fishing pick.
What a Second Wave Means for MGM Stock
Earlier this month, the shares of this hard-hit casino stock went higher, as investors wagered on a rapid, “V-shaped” recovery. In the minds of many, the pandemic was entering the rear-view mirror. Indeed, with many states opening up, it seemed like the nation was going to rapidly “return to normal.”
What a difference a few weeks makes. With reported cases rising, investors, political leaders, and other stakeholders may have gotten ahead of themselves. That is to say, we are far from out of the woods when it comes to the pandemic.
Will Nevada and other states walk back their reopening plans? Will they impose a second lockdown? That remains to be seen. Also unclear is whether MGM’s casino business will continue accelerating throughout the summer.
As InvestorPlace columnist Mark Hake wrote in his June 25 column, “wait and see” is a good approach. With the July 4th weekend just days away, we’ll soon see the extent to which MGM’s operations are bouncing back. If the crowds during Independence Day weekend are larger than expected, that will be a clear sign that things aren’t as bad as recent headlines indicate.
Granted, many will still shun places with large crowds, like casinos. But, if the mask requirements can help minimize infection risks, and if enough people are daring (or stubborn) enough to hit the tables, MGM’s comeback story may still be in motion.
That being said, today’s share price is reasonable, but not dirt cheap. Yet, considering the fact that other casino stocks have become frothier, valuation may not be much of an issue for MGM stock.
MGM’s Valuation Is Reasonable
Using the enterprise value/EBITDA (EV/EBITDA) metric, MGM looks reasonably priced, but not cheap. The shares have an EV/EBITDA ratio of 12.9. Rivals like Caesars Entertainment (NASDAQ:CZR), and Las Vegas Sands (NYSE:LVS) sell at similar or lower valuations.
But, as I wrote earlier this month, the shares look like a bargain compared to Penn National (NASDAQ:PENN) stock. With Penn’s sports-wagering catalyst helping to boost its valuation, that stock currently has an EBITDA multiple of 15.
And that’s despite the fact that the easy money’s already been made with Penn stock. Even as “second wave” fears threaten this company’s comeback, MGM remains a stronger bet on a casino comeback.
Nevertheless, now may not be the best time to buy MGM stock. Given that rising coronavirus cases could cause another selloff, an opportunity to buy the shares at an even cheaper price may be just around the corner.
Sure, there’s a chance that MGM’s July 4 weekend results could exceed expectations, sending its shares higher. But giving up some potential gains for less risk may be worthwhile.
With Uncertainty Still in the Cards, Take Your Time Before Betting on MGM Stock
Casino stocks are less risky than the shares of other hard-hit sectors. Airline stocks, for example, face a bumpier road.Nevertheless, casino stocks could dip down the road, creating a solid entry point.
I’m not saying, “bet big on MGM stock.” It could be years before the company gets fully “back to normal.” But if its stock continues to dip, take advantage of uncertainty and buy it on any pullback.
Thomas Niel, contributor to InvestorPlace, has written single-stock analysis since 2016. As of this writing, Thomas Niel did not hold a position in any of the aforementioned securities.