MGM Resorts International (NYSE:MGM) is the largest operator on the Las Vegas Strip. In a normal environment, that status is a catalyst for MGM stock, but 2020 is far from normal and the “new normal” is presenting a host of challenges to gaming companies, particularly those with significant Sin City exposure.
On July 30, the Bellagio operator delivered second-quarter results that were more dismal than expected and that’s saying something because with commercial casinos across the U.S shuttered large parts, or in some cases, all of the June quarter, the earnings bar is low for the gaming industry.
MGM said it lost $1.67 a share on revenue of $289.81 million in the April through June period. Analysts expected a loss of $1.60 on turnover of $408.95 million.
After posting operating income of $378 million a year earlier, MGM stock notched an operating loss of $1 billion in the second quarter this year. That’s attributable to the novel coronavirus pandemic, a scenario highlighting weakness in Las Vegas where MGM’s revenue slid 90 percent and revenue per available room (REVPAR) plunged 57.2%.
Those are the breaks when only Bellagio, MGM Grand, and New York-New York of MGM’s Strip properties were open for more than three weeks in the third quarter.
Las Vegas Issues and MGM Stock
Nearly two months removed from the first batch of reopenings in Las Vegas, two MGM properties – the Mirage and Park MGM – remain shuttered. On the earnings conference call with analysts and investors, CEO Bill Hornbuckle said those venues are taking reservations for Aug. 27 and it’s not the company’s intent to keep the pair closed indefinitely.
However, there are plenty of rumors about the Luxor, another MGM Las Vegas property, potentially being demolished and the Mirage perhaps being an asset to be sold. The first of those rumors has more momentum, and Horbuckle said the Mirage is important to the company. For now, the company may not need to sell assets because it had $8.1 billion in cash (and $11.4 billion in debt) as of June 30.
Selling the Mirage or keeping it doesn’t change the near-term outlook for MGM and its rivals with deep Strip leverage. While the bulk of Nevada casinos are open again, the Strip is being hammered by the absence of some staples, including business traffic and high end entertainment, both of which are pivotal to MGM’s fortunes.
Convention/corporate business helps prop up weekday occupancy rates, keeping things running smoothly for gaming companies until, in standard operating climates, tourists arrive on the weekends. As for entertainment that’s also pivotal for MGM because of its stakes in T-Mobile Arena and The Park, not to mention shows at individual properties.
Let’s put it this way. From 2007 through 2019, gross gaming revenue (GGR) in Las Vegas grew just 1%, but non-gaming revenue, turnover from stuff like food and beverage, room rates and shows, jumped 30%.
Right now in Las Vegas, there’s not much in the way of business traffic and things are so bad on the concert/show front that MGM canceled all shows until at least Aug. 31, laying off half of the related staff as a result.
In plain English, “rough” is an appropriate adjective for the current state of affairs in Sin City. In fact, that’s exactly how executives from Las Vegas Sands (NYSE:LVS) recently described the scenario in the largest U.S. gaming hub.
Sifting through all of the aforementioned factors, MGM is very much a Covid-19 play. Rather, it’s a play on a coronavirus vaccine coming to market. A recent survey by investment bank indicates 65% of those polled won’t return to Las Vegas until a vaccine is available. Sixty-five percent of last year’s visitors is a big number – 28 million to be precise.
For investors looking for green shoots with MGM, there are a few. As noted above, the company is financially sound. Second, it’s regional properties, particularly those in the Midwest and the South, are performing well post-reopening. Finally, the company’s investor presentation highlights exponential growth possibilities in online casinos and sports betting.
MGM will roar again. It’s just going to take some time and with limited visibility as to when Vegas will be Vegas again, the stock is risky.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.