Slot Games Will Drive MGM’s Domestic Casino Operations In The Coming Years

The Las Vegas Strip continued to see a drop in gaming revenues for the third consecutive month in October. Statewide, revenues fell a little over 4% to $914 million. This was fueled by a 35% drop in baccarat gaming. However, slot revenues were up 7% at the Strip. ^[1] It must be noted that the slot machine wagering largely reflects the health of gaming on the Strip. A growth in slot machine wagering is good news for casino operators such as MGM Resorts (NYSE:MGM), who have a significant presence at the Strip with more than 22,000 slots in the region. MGM’s domestic casino revenues were $1.95 billion for the first nine months of 2014, slightly higher to the prior year period. Going forward, we believe MGM will see steady growth in its domestic casino operations primarily led by the economic recovery. On that note, we discuss below the trends in MGM’s U.S. casino operations and the forecasts we derive for them.

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 $0.40-$0.62, compiled by Thomson Reuters. We currently have a $24 price estimate for MGM Resorts, which is around 20% ahead of the current market price.

See our complete analysis for MGM Resorts International

MGM’s Las Vegas Table Games Operations Are Trending Well

We estimate that the domestic table games contribute more than 6% to MGM’s stock value. The company 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. ^[2] This can be attributed to the recession and the macroeconomic situation in the country during the post recession period.

However, things have started to look better since 2010 and table games money wagers increased to $4.20 billion in 2013 and $3.20 billion in the first nine months of 2014. 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, driven by the recovery in the U.S. economy. The U.S. per capita disposable income is expected to grow from $37,352 currently to $43,312 in 2020, according to a research by IBISWorld. ^[3] As the U.S. economy recovers and per capita disposable income increases, consumer spending on leisure, including gaming and entertainment, will also rise. 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 $1.35 billion and an estimated EBITDA margin of 18.5% will translate into EBITDA of $250 million, representing 5% of company-wide EBITDA by 2021.

Slot Gaming Is The Key To MGM’s U.S. Casino Operations

U.S. slot games contribute close to 12% to MGM’s stock value, according to our estimates. The company’s domestic 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 and $1.24 billion in the first nine months of 2014. ^[2] 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. Going forward, the company will add another 3,600 slots in its Maryland casino in 2017 and this will boost the domestic casino revenues. 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.

According to Nevada Gaming Control Board, the pre-recession Strip average for 2007 was $215. ^[4] As the world economy stabilizes and per capita disposable income increases, the slot handle is expected to rise 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 $2.50 billion and an estimated EBITDA margin of 18% will take EBITDA close to $430 million, representing 9% of the company-wide EBITDA by 2021.

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1. Nevada gaming revenue dips, but positive note seen in slots, Casino City Times, Nov 26, 2014 [↩]
2. MGM Resorts’ SEC Filings [↩] [↩]
3. Business Environment Report – Per capita disposable income, IBISWorld, September 2014 [↩]
4. IN FOCUS: LAS VEGAS CASINO & HOTEL MARKET OUTLOOK 2014, HVS, Jun 26, 2014 [↩]