Why the Long-Term View of MGM Is Positive

MGM (NYSE:MGM) reported that its Las Vegas casinos performed about in-line with my expectations and the company reported that it had $8 billion of liquidity as of June 30. I remain upbeat on the longer-term outlook of MGM stock.

A photo of the MGM logo on the MGM casino building.
Source: Michael Neil Thomas / Shutterstock.com

The casino operator’s Q2 results, which came in below analysts’ average outlook and featured a large loss, were not very important. That’s because, due to the novel coronavirus, all of MGM’s Las Vegas casinos were closed for most of Q2.

What was much more crucial for the outlook of the company and MGM stock was the casinos’ performance since they reopened.

Better News for MGM Stock Investors

And the news on that front was rather good. Since the reopening, the EBITDAR (EBITDA excluding rent or restructuring) of MGM’s Las Vegas casinos fell 44% year-over-year. Their margins increased about 4.5 percentage points YOY. Those numbers were about in-line with my prior expectations.

Multiple analysts and media outlets stated that traffic declined in Las Vegas in recent weeks amid an increase of Covid-19 cases in Nevada and California. This made me think there was a meaningful deterioration of the city’s casinos performance after July 4.

Surprisingly, however, MGM’s CEO Bill Hornbuckle said that the EBITDAR of all of the company’s Las Vegas casinos except for Mandalay Bay “are now positive.” And, he said that the company’s performance in the city “stabilized” in July. Further, MGM CFO Corey Sanders said, “I think we’re seeing some pretty strong demand in our limited capacity on the weekends.”

Additionally, Hornbuckle noted the cash burn rate of all of the company’s reopened casinos in Las Vegas declined. He said 14 of the company’s 18 U.S. casinos reopened.

Demand for Gaming

Hornbuckle reported that MGM is benefiting from “pent-up demand,” as well as strong weekend traffic.

And “optimizing [its] business to serve higher quality customers” and reducing costs also boosted the casinos’ results, according to the CEO.

He also said “domestic properties that opened in the second quarter generated positive EBITDAR faster than expected.”

Meanwhile, refuting my previous thesis that Las Vegas casinos would outperform regional casinos, the EBITDAR, excluding some items, of MGM’s reopened regional casinos dropped just 14% YoY. Their margins rose about 8.8 percentage points YoY. Hornbuckle added that the regional casinos to which gamblers usually drive saw their EBTIDAR increase 18% YoY, while margins jumped 14 percentage points YoY.

MGM “significantly” reduced its overall cash burn rate after its U.S. casinos began to reopen, Horbuckle said.

MGM Has Plenty of Liquidity

All in all, it sounds like MGM is not currently losing much money. And Hornbuckle said that the casino operator had $8 billion of liquidity as of June 30, including $4.8 billion in the U.S.

Moreover, the company can raise an additional $700 million, under the terms of a previous deal, by selling shares of its stake in MGM Growth Properties, Hornbuckle said.

And importantly, a Seeking Alpha columnist who analyzed the company’s balance sheet recently found that it “can easily withstand one bad year.” He added that the company’s “quick ratio” decreased in recent months. This indicates it “can take on some more debt without being too heavily leveraged and without facing the risk of diminishing liquidity for their bonds”

The Bottom Line on MGM Stock

MGM’s casinos performed relatively well since they were reopened, and, based on Hornbuckle’s update, the company’s cash-burn rate appears to be quite low. Further, in general it sounds as though MGM’s Las Vegas casinos are doing much better than many had anticipated.

Meanwhile, MGM has plenty of cash and its balance sheet is reportedly in very good shape.

Given all these points, I remain convinced that MGM can easily hold on until a vaccine for Covid-19 is introduced. The company can do this without diluting its current shareholders or taking any other extraordinary measures.

Consequently, I continue to recommend that investors buy MGM stock at its current levels.

Larry Ramer 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 Roku, solar stocks and Snap. You can reach him on StockTwits at @larryramer. As of this writing, Larry Ramer did not own any of the aforementioned stocks. 


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