Earnings Preview: MGM’s Casino Results Will Reflect Headwinds From A Decline In Gaming

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MGM Resorts (NYSE:MGM) will report its Q3 2014 earnings on October 30th. We believe the company continues to face headwinds from a decline in gambling, both in Macau and the Las Vegas Strip. While Macau witnessed a decline of 7% in gaming, Nevada gaming declined 3% for the quarter. [1] [2] However, we expect continued growth in the company’s non-gaming operations. The company expects 5% growth in hotel RevPAR (revenue per available room) for the third quarter. [3]

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. It must be noted that the stock price has corrected by more than 10% since the company last reported its earnings. Casino stocks have corrected as investors realized the decline in Macau gaming would persist in the coming months.

See our complete analysis for MGM Resorts International

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MGM Will Face The Headwinds From A Decline In Macau Gaming

We estimate that Macau operations contribute more than 35% to MGM’s stock value. In June 2014, Macau’s casino market witnessed a decline for the first time in five years. The world’s largest gambling hub extended the decline in the emsuimg months through September. While revenues declined by around 3.7% in June and July, it was far worse in the following months, with declines of 6.1% and 11.7% for August and September, respectively. [4] This can be attributed to the Chinese government’s anti-corruption crackdown, which kept VIP players away from Macau. A wave of high-profile arrests of senior Chinese officials is hurting the VIP business of Macau casinos. Moreover, the government has imposed visa transit restrictions, which has shortened the duration of visitors’ stays in Macau to five days, and it has imposed greater penalties for non-compliance.

While it is difficult to assess how long the gaming will suffer in Macau, Sheldon Adelson, Chariman and CEO of Las Vegas Sands, said that gambling might recover in three to four months time. [5] MGM earns more than 90% of its China revenues from its casino operations in Macau. The company’s Macau revenues last quarter declined 1% to $828 million, though EBITDA grew 3% to $225 million. [6] We expect the region’s casino revenues for the year to be around $3.54 billion and an estimated EBITDA margin of 24% will translate into EBITDA of over $800 million.

Expect Continued Growth At The Las Vegas Strip

MGM’s U.S. operations witnessed 6% revenue growth in the previous quarter driven by higher gaming volume and growth in hold percentage. [6] However, the company derives a significant portion of its revenues from non-gaming sources. The U.S. hotels business alone accounts for more than 30% to the company’s value, according to our estimates. We expect to learn of strong growth in its hotels operations for the third quarter, which likely benefited from the higher convention mix. The company expects 16% of its room nights to come from convention side for the full year.

We don’t expect any significant growth in the company’s casino operations in the U.S. The Las Vegas Strip saw a 6% drop in gaming in August and 12% drop in September. [7] [2] In the previous quarter, casino revenues grew 6% due to a higher table games hold percentage. It will be interesting to see how it trends in the third quarter. Any strength in the hold percentage will aid the overall growth in casino revenues. Moreover, the growth of Baccarat in the U.S. is aiding overall casino revenue growth. 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. [8] In August this year, Baccarat revenues dropped to $166.7 million as compared to $193.51 million in the prior year period. However, this was due to lower hold percentage of 15.92% as compared to the prior year period when the figure was unusually high at 18.92%. Looking at the first eight months of 2014, baccarat wagering at the Strip is up 11%. [9]

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Notes:
  1. Macau Casino Stocks Rise as Monthly Sales Meet Estimate, Bloomberg, Oct 6, 2014 []
  2. Nevada gambling revenues down 6 percent in Sept., Bloomberg Businessweek, Oct 28, 2014 [] []
  3. MGM Resorts International’s (MGM) CEO James Murren on Q2 2014 Results – Earnings Call Transcript, Seeking Alpha, Aug 5, 2014 []
  4. Monthly Gross Revenue from Games of Fortune, Gaming Inspection And Coordination Bureau Macau, As of Oct 2014 []
  5. Las Vegas Sands’ (LVS) CEO Sheldon Adelson on Q3 2014 Results – Earnings Call Transcript, Seeking Alpha, Oct 16, 2014 []
  6. MGM Resorts’ SEC Filings [] []
  7. GAMING REVENUE REPORT, Nevada Gaming Control Board, August 2014 []
  8. 2013 Mid Year Report, Colliers International Gaming Group []
  9. GAMING REVENUE REPORT, Nevada Gaming Control Board, August 2013 []