Inside Wall Street: Vegas is back for investors
MGM Resorts is one of the stronger and safer bets in the rebounding industry.
Nongambling folks might not be aware of this, but despite concerns about consumer confidence, gambling and tourism have regained some of their vigor where they were sorely missed: Las Vegas. Yes, the epicenter of gaming and conventions is back. Tourists and gamblers are again visiting The Strip in droves, enlivening cash registers and boosting sales at casinos and hotels.
Widely followed entertainment shows and global sports events continue to be a draw and still happen in Las Vegas, fueling the speed of its comeback. It was in Las Vegas, on Nov. 12, 2011, that boxing Welterweight champion Manny Pacquiao defended his crown and again beat challenger Manuel Maquez in a 12-round fight before a sellout crowd of 16,368.
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"We remain positive on the prospects of the Las Vegas market as both leisure and convention business continue to improve," says Steven Kent, analyst at Goldman Sachs. This bodes well for the gaming and hotel/casino companies because their businesses are bound to start really booming once the U.S. economic recovery picks up speed. As a result, investors have started to re-discover the long-ignored gaming stock.
One of the most attractive Las Vegas pure plays is MGM Resorts International (MGM), a major casino and hotel owner/operator whose assets on the Strip include Bellagio, Mandalay Bay, The Mirage, and CityCenter, the latest in MGM’s luxurious urban resorts. Clearly a Las Vegas-centric company, MGM’s properties on the Strip accounted for 79% of the company’s earnings before interest, taxes, and amortizations (EBITDA) and 73% of total revenues. MGM also owns casino-hotel properties in other parts of Nevada, as well as in Mississippi, Michigan, and China.
"We see Las Vegas trends improving on an increase in higher-margin convention business and we see improved liquidity at MGM," says Esther Kwon, analyst at Standard & Poor’s. She notes that room rates have been rising as convention bookings have continued to accelerate. She also expects MGM’s new properties in China to grow rapidly. She believes revenues in 2012 will jump about 19%, including the first full-year contribution from MGM properties in China. Last year, MGM’s revenues climbed to $6.01 billion, from 2009’s depressed $5.97 billion.
MGM’s heavy debt load as a result of its development of CityCenter and the cost of building its property in Macau, has been a source of some concern. But Kwon sees some expense leverage as the company keeps its operating costs and head count tightly controlled. And the analyst also projects overall EBITDA margin expansion as the higher-margin MGM China properties grow faster and contribute more to operating earnings.
MGM’s financial results in the third quarter reflected how things have continued to improve in Las Vegas. Its occupancy numbers as well as revenues per customer have increased along with the broader gaming statistics, such as revenues from slot machines, according to Felicia R. Hendrix, analyst at Barclays Capital Partners. The third quarter EBTIDA OF $443.9 million was way above the previous year’s $279.2 million and beat consensus Street forecast of $438.5 million.
"Overall, the third-quarter results confirm the positive thesis on MGM," says Hendrix, who expects its revenues to rise to $6.24 billion in 2011 and jump to $9.91 billion in 2012, from 2010’s $6.02 billion. And she forecasts EBITDA this year to climb to $1.64 billion and ramp up to $2.56 billion in 2012, up from last year’s $1.04 billion.
One other factor that is seen as a positive for MGM by some pros is the thus far unspectacular performance of its stock. Shares of MGM have been on the ropes and year-to-date are down some 28%, compared with the Dow Jones industrial average’s rise of 4.8%. MGM’s stock closed on Nov. 11 at $10.36 a share, down from its 52-week high of $16.94.
But Hendrix sees MGM doubling in 12 months, to $20 a share, mainly due to improving company and industry fundamentals. Based on its 2012 enterprise-value-to-EBITDA ratio of 10, MGM is trading below its peers, such as Wynn Resorts (WYNN) and Las Vegas Sands
(LVS), which are trading at about 12 times their 2012 EBITDA.
Analyst Ryan Worst of investment firm Brean Murray Carrett & Co. expects MGM’s price multiple to catch up with its peers. So he views its currently depressed stock price "as attractive, given the upside from eventual improvement in the U.S. economy and cash flow/growth potential" in MGM’s gaming operations in Macau.
Ryan, who rates MGM as a buy, believes that a potential dividend payment from Macau, continued strengthening of operations, and refinancing of its debt load could be a "catalyst to drive MGM’s valuation multiple more towards its peers."
Only in recent weeks has the gaming sector caught up with the stock market’s sharp, if volatile, advance. So with the sun again shining on Las Vegas, MGM Resorts should be one of the stronger and safer bets in the rebounding industry.
Gene Marcial is now a contributing financial columnist for MSN Money, bringing his Inside Wall Street column to Top Stocks.
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