Growth At The Strip Drives MGM’s Earnings

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MGM
MGM Resorts

MGM Resorts (NYSE:MGM) recently posted its Q2 2014 earnings. Revenues were up 4% to $2.6 billion while EBITDA grew 8% to $643 million. Earnings per share were $0.21 as compared to per share loss of $0.19 in the prior year period. [1] The growth was primarily driven by its properties at the Las Vegas Strip.

In Macau, MGM’s VIP gaming turnover declined by 10% during the quarter. This was on expected lines as the casino operations of Las Vegas Sands (NYSE:LVS) and Wynn Resorts (NASDAQ:WYNN) also struggled in Macau over VIP gaming. It must be noted that Macau gaming revenues declined in June and July due to a combination of shift of betting towards sports and the government crackdown on corruption and junket operators. This has led to around 20% decline in VIP gaming in June and between 14% and 18% in July. [2] Meanwhile, mass-market gaming continues to grow strongly in the region and MGM saw a 41% surge in mass-market table games win amount during the quarter.

MGM continues to expand in the U.S. as well as internationally. The company has started the construction at $1.2 billion casino resort project in Maryland. The company is also building a casino resort in Cotai and is now eyeing Japan, which may soon legalize the casinos in the country.

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We currently have $22 price estimate for MGM which we will soon update based on the recent quarterly earnings.

See our complete analysis for MGM Resorts International

MGM Sees Strong Growth At The Strip

Casino revenue related to its domestic resorts increased 6% driven by higher volume and growth in hold percentage. Table games hold was 21.3% for the quarter as compared to 18.1% in the prior year period. [1] The company saw steady growth in its non-gaming businesses. It must be noted that MGM derives a significant portion of its revenues from non-gaming sources. The U.S. hotels business alone accounts for more than 30% of the company’s value, according to our estimates. Hotel revenues grew 6% led by 6% growth in revenue per available room (RevPAR). Food and beverage revenue also increased 5% due to increased convention and banquet business. The company expects the convention mix to be over 16% for the full year. [3] Accordingly, the company has given a guidance of 5% growth in hotel RevPAR for the third quarter. We expect the hotel business in particular to do well in the near term as well as in the long run. A recovery in the economy and higher consumer spending will boost the RevPAR. We estimate RevPAR will be north of $170 towards end of the decade as compared to $120 seen in 2013.

Growth In Mass-Market Gaming Intact

Macau operations contribute close to 40% to MGM’s value, according to our estimates. While the revenues declined by 1% to $828 million, EBITDA was 3% higher at $225 million in the region, driven by growth in mass-market gaming. [1] It must be noted that mass-market gaming provides much higher margins as compared to VIP gaming and a high growth rate in this segment is great news for the company. As far as VIP gaming is concerned, it appears that an active government crackdown on corruption has kept some VIPs away from Macau in the past two months. This was further clubbed with increased betting on FIFA World Cup. This trend in Macau was also visible during the previous FIFA World Cup. However, we believe things should get back to normal from August and VIP gaming should pick up. We continue to believe in Macau’s growth story as there is a very small percentage of population visiting Macau currently, and as the economy grows and the number of HNIs (high net worth individuals) increases, more and more people will visit the gambling capital.  MGM will benefit from its new resort in Cotai, which will host 1,600 hotel rooms, 500 gaming tables and 2,500 slot machines. The resort will be operational by 2016. Accordingly, we estimate Macau EBITDA to be north of $3 billion towards end of the decade.

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Notes:
  1. MGM Resorts’ SEC Filings [] [] []
  2. Wary High-Rollers Shy Away From Macau’s Casinos, The Wall Street Journal, Aug 1, 2014 []
  3. MGM Resorts International’s (MGM) CEO James Murren on Q2 2014 Results – Earnings Call Transcript, Seeking Alpha, Aug 5, 2014 []