MGM To Benefit Post An August Gaming Decline As Outlook Still Remains Positive

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After five months of gaming growth, Nevada witnessed a 4% drop in gaming revenues for August. Revenues at the Las Vegas Strip dropped by more than 6% to $553 million. [1] However, it must be noted that the Strip witnessed a 20% jump in revenues in the prior year period amid an unusual higher baccarat hold of 18.92%. [2] The money being wagered on Baccarat continued its uptrend and grew 2.4% for the month. This will benefit casino operators such as MGM Resorts (NYSE:MGM), who have a significant presence at the Strip. The casino operators have been trying to attract more Asian high rollers, who prefer baccarat to other casino games, and the growth of baccarat is helping the company grow. Going forward, the economic recovery and higher consumer spending will only make things better for the casino operators at the Strip.

Total value of MGM’s Las Vegas table games money wagers was $4.2 billion in 2013. The reported win percentage of 20.5% translates into revenues of $861 million for the year. [3] The estimated EBITDA margin of 14% for the company’s Las Vegas casino operations translates into EBITDA of $123 million, representing 7% of MGM’s overall EBITDA for 2013. The U.S. casino table games contribute more than 6% to MGM Resort’s stock value, according to our estimates.

See our complete analysis for MGM Resorts International

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How Are MGM’s Las Vegas Table Games Operations Trending?

MGM Resorts offers approximately 1,296 table games in the U.S. Table games include blackjack, baccarat, craps, and roulette among others. The casino earns revenues on the hold over the amount of money being wagered at the gaming tables. The hold percentage is usually between 18% and 22% but varies from game to game. Total value of table games money wagers dropped from $5.96 billion in 2006 to $3.93 billion in 2010. [3] This can be attributed to the recession and macroeconomic situation in the country during the post recession period. However, things started to look better since 2010 and table games money wagers increased to $4.2 billion in 2013. The hold percentage remained in its usual range for the entire period, and we don’t expect it to change in the coming years. However, going forward, we forecast the amount of money wagered  to increase as a result of revival in the U.S. economy. As the U.S. economy recovers, consumer spending on gaming and entertainment is expected to increase. Accordingly, we estimate table games money wagers to be north of $6.5 billion and hold percentage to remain at 21% by the end of our forecast period. This will take revenues north of $1.3 billion and an estimated EBITDA margin of 18.5% will translate into EBITDA of $250 million by 2021.

Growth In Baccarat

Asian high rollers prefer baccarat to other games and this has led a steady increase in the Baccarat’s market share from 22% in 2004 to over 40% in 2013. [4] In August this year, baccarat revenues dropped to $166.7 million as compared to $193.51 million in the prior year period. [1] This can be attributed to lower hold percentage of 15.92% as compared to the prior year period when the figure was unusually high at 18.92%. [2] However, looking at the first eight months of 2014, baccarat wagering at the Strip is up 11%. In sum, we believe the August gaming decline does not warrant any caution and it was primarily a result of tough comparison with the prior year period.

We estimate gross revenues of about $11 billion for MGM Resorts in 2014, with EPS of $0.54, which is in line with the market consensus of $0.47-$0.82, compiled by Thomson Reuters. We currently have a $26 price estimate for MGM Resorts, which is approximately 15% ahead of the current market price.

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Notes:
  1. GAMING REVENUE REPORT, Nevada Gaming Control Board, August 2014 [] []
  2. GAMING REVENUE REPORT, Nevada Gaming Control Board, August 2013 [] []
  3. MGM Resorts’ SEC Filings [] []
  4. 2013 Mid Year Report, Colliers International Gaming Group []