Scores of names across the travel and leisure industry, including airlines, casino operators, cruise lines and hotels, are tethered to developments on the Covid-19 vaccine front. As the king of the Las Vegas Strip, as measured by number of properties there, MGM (NYSE:MGM) stock is part of that group.
Here’s the lay of the land with the vaccine. In non-pandemic times, effective vaccines can take years to develop. The timeline is being significantly trimmed for novel coronavirus vaccines, thanks to Operation Warp Speed. However, the time frame remains fluid and there’s essentially no chance that a vaccine come to market before the end of this year. Try the third quarter of 2021.
That’s problematic for MGM and rivals that depend on the Strip for significant chunks of earnings before interest, taxes, depreciation and amortization (EBITDA) and revenue.
Convention traffic is down. Way down and it’s going to be some time before it rebounds. Second, some studies conducted by Wall Street firms confirm leisure travelers simply don’t want to go Las Vegas until a vaccine is available. In a typical year, Golden State residents account for almost 20% of visits to Vegas. That number is dwindling against the coronavirus backdrop because unemployment in the largest U.S. economy is in the double digits.
‘Neutral’ Might Be Best on MGM Stock
Shares of the Bellagio operator probably aren’t a screaming “sell,” but there’s not much reason to aggressively buy here, either.
Admittedly, it’s encouraging to see the company recently tap bond markets for $750 million to raise additional cash after doing so in May. There’s an appetite for MGM debt and its balance sheet is relatively firm with $8.1 billion in cash and no debt maturing until 2022.
“The cyclical, competitive, capital-intensive nature of the Strip combines with a basket of well-known macro/specific travel and Las Vegas negatives, seemingly dismissed by investors since IAC took a 12 percent stake in MGM,” according to Goldman Sachs.
In plain English, while MGM has a solid portfolio of regional properties, though not as deep as say Caesars Entertainment (NASDAQ:CZR) or Penn National Gaming (NASDAQ:PENN), strength in markets such as Detroit or Mississippi isn’t enough to offset Las Vegas headwinds.
Beware a Source of Allure
Any investor paying casual attention to casino equities this year is hearing something about the growth of iGaming and sports wagering. IAC has deep expertise in converting offline fans to online customers.
Indeed, BetMGM is growing. It’s average market share in the states in which it operates is 17% and the business should generate $150 million to $160 million in revenue this year.
That’s good, but not great. First, that’s not nearly enough to offset the aforementioned Vegas weakness. BetMGM is a 50/50 joint venture with UK-based GVC Holdings Plc, meaning MGM doesn’t command all of the economics in the partnership.
Investors looking to wager on the growth of online gaming and sports betting may be bettered served doing so with a company that’s not burdened by tending to brick-and-mortar casinos. Those willing to roll the dice on a Sin City recovery that could take two years or more should consider MGM.
On the date of publication, Todd Shriber did not have (either directly or indirectly) any positions in any of the securities mentioned in this article.
Todd Shriber has been an InvestorPlace contributor since 2014.