MGM Resorts (NYSE: MGM) is experiencing a rapid recovery in business after casinos closed during the pandemic. Las Vegas is booming, fueling MGM’s EBITDAR. Two upcoming catalysts are not included in the price, as the stock is extremely cheap compared to competitors. More so, the company repurchased 8% of outstanding shares in the second quarter. Ultimately, free cash flow exceeded 2019 highs to support shareholder returns and reinvestments.
Price action since the COVID-19 pandemic
By now, we all know the kind of havoc caused by the COVID-19 pandemic. The entire hospitality industry was doomed; however, one of them escaped almost unscathed. Although MGM Resorts is still down more than 30% from the 52-week high, the stock has held up better than its peers. Now is the time to research the stock and figure out what you want to do.
On the face of it, it is clear that the company has struggled on the profitability side of the business as casinos have had to close all over the world. Nevertheless, the business has recovered and the hospitality industry is now awash with people who want a little excitement in life. Based on the price/earnings, price/free cash flow and EV/EBITDA ratios, it is clear that the business is currently being priced cheaper compared to pre-pandemic levels.
Las Vegas is back
MGM Resorts is thriving in Las Vegas, generating $2.1 billion in revenue and record EBITDAR during Q2. These results include revenue that MGM received from new acquisitions of “the cosmopolitan” and “AriaRegardless, same store revenue was also up almost 60% from the same quarter last year.
Las Vegas Convention and research by the Visitors Authority has provided excellent insight into current tourism in Las Vegas. Year on year, you can clearly see that business is picking up. However, there is still room for improvement from pre-pandemic levels. Visitor volume, convention attendance and hotel occupancy are still lacking compared to 2019. As a result, MGM’s revenue could be more positive as visitor volume recovers alongside stable margins.
Two Ongoing Positive Catalysts
Relief from China
MGM’s Chinese segment is lagging behind the company’s overall performance. Even though the company achieved a record EBITDAR in the Las Vegas Strip, the China segment EBITDAR resulted in a loss of $52 million. An easing of public health policy in China could reshape earnings and further improve business fundamentals.
A JPMorgan analyst expects significant business to return to Macau during Golden Week (national holiday) in October.
On the other hand, the company has established a leading position on its BetMGM digital platform in US sports betting and iGaming. So far, the platform continues to lose money as the first priority is to gain a strong market share and build brand awareness in the online industry. Although this brings a lot of expenses on the table, BetMGM is expected to show positive EBITDA as early as 2023.
During the second quarter earnings call, CEO Bill Hornbuckle said:
BetMGM now operates in 23 markets across the United States and Canada, across retail, esports and iGaming operations. In May, BetMGM committed 21% market share in the active US sports betting and iGaming markets, putting us in second place.
BetMGM is the undisputed leader in iGaming and reached 29% market share in May. And looking forward to the addition of Ohio to Massachusetts, as well as the potential of California, we continue to see great opportunities for expansion with BetMGM. We are accessible to all three states and have over 45 million addressable audience.
Adding new states will boost short-term growth. Keep an eye out for the legalization of sports betting and iGaming in California and Texas. Once these states are given the green light, BetMGM’s growth could be immense. By the end of 2023, the new platform is expected to access 40-45 markets.
Market lacks overview
In 2019, MGM China revenue ($2.9 billion) accounted for 22% of the company’s total revenue. In 2021, MGM China’s revenue ($1.2 billion) was only 12.5% of total revenue. In 2022, the Q1 and Q2 revenue in China is down 63% and 53% respectively compared to 2021.
Revenue estimates for 2023 are only $1 billion higher than 2022 estimates. MGM China’s recovery alone may fuel the $1 billion rise in revenue. All of this does not include the possibility of having more visitors to Las Vegas and the growth of BetMGM’s revenue with the addition of new markets. Therefore, it looks like earnings estimates are a little soft and upward revisions could occur throughout the year.
MGM Resorts is unquestionably the highest rated stock relative to industry peers. At 2.98x EV/EBITDA, it seems that the catalysts mentioned above are not really taken into account. Therefore, the current stock price could be an excellent entry point for long-term investors.
Additionally, MGM’s free cash flow has surged past the 2019 high. As a result, the price-to-cash-to-free-cash-flow ratio looks very attractive. The only close competitor appears to be PENN Entertainment (PENN). Wynn Resorts (WYNN) and Las Vegas Sands Corp (LVS) are still struggling to achieve positive free cash flow.
Profitability allows redemptions instead of dilution
With free cash flow back on track, the company has room to give back to shareholders. During the second quarter, the company repurchased $1.1 billion of shares or 8% of outstanding shares at $34.42 per share. This is what makes MGM much more attractive compared to its peers. Almost every other casino company has had to increase shares outstanding during the pandemic to continue operations. As a result, investors became diluted and lost the value of their shares. The graph below highlights the excellent business performance and management execution of MGM Resorts.
A dividend reinstatement could be the icing on the cake. However, at current prices, management should focus on the share buyback plan. Going forward, there is a good chance that the normal dividend yield will return, when redemptions become less attractive and activity in Macau picks up.
Of course, every investment has risks and we have to consider them to a large extent to become a better investor.
Although the chances are quite low, a new pandemic or epidemic can occur at any time. I say the odds are pretty low, because the world is ready more than ever. The infrastructure, equipment and amount of knowledge have only improved and therefore the risk of complete closures has decreased. The future of business in China is in the hands of the government and how long it will maintain strict Covid-19 measures. Nevertheless, investors should not worry too much in the long term as these measures are not permanent.
The start of a recession is another risk for the casino industry. Most casino visitors gamble with money they can lose, when there is no money left to spend the casinos could be in trouble. A bright spot for the casino industry is the strong unemployment rate which has only diminished. As long as people have money, they can spend it.
I rate MGM Resorts as a strong buy at $35 per share. The company’s business performance and management execution led to a great recovery from the pandemic. At the current price, long-term investors are likely to be rewarded. The stock is undervalued, while investors ignore the possible recovery of activity in Macau and the expected growth and profitability of BetMGM. Finally, the buyback program shows investors that the company is healthy and will reward investors.