Are Investors Too Optimistic On MGM Resorts Stock?

[Updated 2021/11/03]

As the world economy grapples towards normalcy with an uptick in transportation demand, the hotel industry stocks have almost recovered to pre-Covid levels. The hospitality industry including integrated resorts such as MGM Resorts (NYSE: MGM) and Las Vegas Sands (NYSE: LVS), curtailed operational expenses to preserve cash and limit long-term debt. Interestingly, the demand for digital gaming solutions during the pandemic triggered a paradigm shift in the casino business. Nearly all conventional casinos are foraying into the American sports betting and iGaming industry. Despite MGM’s revenues remaining 30% below pre-Covid levels due to a slump in Macau, the stock is being rewarded by investors due to the popularity of its sports betting application, BetMGM MGM . Considering strong competitive rivalry in the sports betting business and MGM stock’s high current valuation multiple (P/S), Trefis believes that the stock price is stretched. We highlight the key factors driving MGM Resorts Valuation including revenues, earnings, and stock prices in an interactive dashboard.

[Updated 2021/10/08] – Do Odds Still Favor MGM Resorts Stock?

The uncertain regulatory environment in Macau, prolonged weakness in the travel industry, and Las Vegas Sands’ (NYSE: LVS) move to divest its U.S. business has led to a 50% decline in its stock. Instead, the shares of MGM Resorts (NYSE: MGM) are trading 40% above pre-Covid levels primarily assisted by its foray into the sports betting and iGaming industry. The broader casino industry turned bearish after Macau’s gaming regulator indicated increased regulatory oversight in its five-year development plan apart from MGM Resorts. As highlighted in our previous article, Is MGM Resorts Stock A Good Casino Industry Pick, MGM Resorts, Las Vegas Sands, and Wynn Resorts WYNN generate 22%, 64%, and 40% in revenues from Macau, respectively. Considering MGM Resorts’ sizable Macau exposure, lower cash generation and lower total asset return capability than Sands, and significant long-term debt obligations, Trefis believes that MGM Resorts stock has reached its near-term potential. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis, Las Vegas Sands vs. MGM Resorts International: Industry Peers; Which Stock Is A Better Bet?

1. Revenue Growth

MGM Resorts’ growth was a bit stronger than Las Vegas Sands before the pandemic, with MGM Resorts revenues expanding at an average rate of 11% per year from $9.5 billion in 2016 to $12.9 billion in 2019. Las Vegas Sands’ revenues grew at an average rate of 7% per year from $11.2 billion in 2016 to $13.7 billion in 2019. Due to mandated closures and subsequent restrictions, MGM Resorts and Las Vegas Sands reported a 60% and 74% top-line contraction in 2020, respectively.

• In 2019, Sands’ Macau, Vegas, and Singapore properties contributed 63%, 15%, and 22% of total revenues, respectively. Before the pandemic, the company’s Macau business observed strong growth assisted by new property openings, mass-market gaming wagers, and rising tourist numbers. With the pandemic impacting finances, Sands completely shifted its focus to its Asian business, as it contributes almost three-quarters of revenues & earnings, by announcing the sale of its Vegas property.
• MGM Resorts’ Macau, Vegas, Regional (U.S.), and Other businesses contribute 22%, 45%, 28%, and 5% of total revenues, respectively. The company has a strong presence in the U.S. and has also been gaining traction in the sports betting and iGaming space.
• Notably, MGM’s diversified presence has been a boon for the stock in recent months as increased regulatory oversight and proposed changes in Macau’s gaming law are anticipated to weigh on Macau casinos.
• Interestingly, MGM’s plan to expand its Asian presence with an integrated resort in Japan will further diversify its business portfolio.
• Instead, Sands’ strong Macau focus is adding a lot of uncertainty for investors given the proposed changes in Macau’s gaming law.

2. Returns (Profits)

Before the pandemic, MGM Resorts and Las Vegas Sands’ operating margin has remained between the 20-30% range. However, both companies incur sizable interest expenses lowering the net income margin by almost 10-percentage-points. Historically, Sands had a slight edge over MGM, mainly assisted by its leadership in Macau’s mass gaming segment.

• In 2019, Sands reported $13.7 billion of net revenues and $3 billion of operating cash flow – an operating cash flow margin of 22%. The company returned $3 billion as dividends to shareholders.
• In 2019, MGM Resorts reported $12.9 billion of net revenues and $1.8 billion of operating cash flow – an operating cash flow margin of 14%. The company returned $270 million as dividends and purchased $1 billion of common stock.
• Considering the operating cash flow margin and shareholder returns, Sands has an edge over MGM Resorts.

3. Risk

In 2019, Sands reported $12.5 billion of long-term debt, $6.5 billion of total equity, and $23 billion in total assets. MGM Resorts reported $15 billion of long-term debt and operating lease liabilities, $12.5 billion of total equity, and $33 billion in total assets. Considering the total asset turnover ratio (revenue/total assets), Sands is significantly better than MGM Resorts as both companies generated almost similar $13 billion of revenues in 2019.

• Despite a prolonged slump due to the coronavirus crisis, Sands and MGM Resorts did not incur sizable impairment charges. Moreover, cost control measures limited the operating cash burn of both companies to around $1.5 billion in 2020.
• Thus, the pandemic has not weakened either company’s balance sheet.
• Given the sizable long-term debt obligations on the balance sheet of both companies, cash generation capabilities in the post-pandemic period will impact shareholder returns.
• Hence, the uncertain regulatory environment in Macau is currently weighing on Sands stock. (related: Should You Bet On Las Vegas Sands Stock After The Historic Announcement?)

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