How Are MGM’s U.S. Slots Operations Trending?

MGM Resorts (NYSE:MGM), unlike other casino operators, derives a majority of its revenues from its U.S. operations. Around 40% of these revenues are generated from gaming sources, which primarily include table games and slot machines. Slot games contribute more than 60% to the domestic casino revenues. Slot revenues in the U.S. have declined over the past few years due to growing popularity of table games such as baccarat. While baccarat is growing strongly in the region driven by an increase in Chinese players, who prefer baccarat to other games, slot games continue to bring in most of the revenues for casinos. Nevada statewide slot revenues have declined from $8.45 billion in 2007 to $6.75 billion in 2013. ^[1] Its contribution to the overall casino revenues has also declined from 65% to 60% between 2007 and 2013, reflecting the growth in table games. The decline in revenues can largely be attributed to the recession. The casino industry at the Las Vegas Strip was worst hit by the event and it has still been unable to reach the pre-recession levels. However, MGM has been able to increase its win amount per slot machine over the past few years, which, to some extent, has offset the decline in slot revenues. We estimate continued growth in win per slot, which will drive the casino revenues in the coming years.

We currently have $26 price estimate for MGM, representing a premium of over 5% to the current market price.

See our complete analysis for MGM Resorts International

How Is Slot Games Business Trending For MGM?

MGM’s U.S. slot games revenues declined from $2 billion in 2007 to $1.65 billion in 2010. However, post 2010, they have been growing at an average annual rate of 2%, amounting to $1.67 billion in 2013. ^[2] An estimated EBITDA margin of 14% translates into EBITDA of over $220 million in 2013.

Growth in slot revenues over the past few years can be attributed to an increase in MGM’s win per slot machine per day. It has grown from $173 in 2009 to $201 in 2013. Despite a drop in the number of slots from 25,543 in 2009 to 22,793 in 2013, MGM was able to grow its slot revenues. ^[2] Going forward, the company will add another 3,600 slots in its Maryland casino in 2017 (Also See – MGM Closer To Setting Up Springfield Casino Resort). The present slot mix at MGM has yielded a below industry average slot machine win per unit per day. This could be largely attributed to a decline in slot handle and slot mix due to the economic recession. In addition, a suboptimal slot mix could also be a reason behind the below average slot machine win per unit per day.

According to Nevada Gaming Control Board, the pre-recession Strip average for 2007 was $215. ^[3] As the world economy stabilizes and consumer spending increases, the slot handle is expected to increase in the coming years. The expected increase in slot handle would lead to higher slot machine win per unit per day. Accordingly, we expect MGM to continue to see growth in its win per slot and forecast it to be close to $250 by the end of our forecast period. This will translate into slot revenues of over $2.5 billion and an estimated EBITDA margin of 18% will take EBITDA close to $430 million by 2021. It must be noted that there could be a possible upside of 5% to our price estimate for MGM if the win amount per unit grows to over $300 by the end of our forecast period. On the other hand, there is a possible downside of 5% if the slot win per unit per day remains rangebound around $200.

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1. Nevada Gaming Revenues, 1984-2013, UNLV Center For Gaming Research [↩]
2. MGM Resorts’ SEC Filings [↩] [↩]
3. IN FOCUS: LAS VEGAS CASINO & HOTEL MARKET OUTLOOK 2014, HVS, Jun 26, 2014 [↩]