MGM Resorts Will Post Lower Earnings Amid A Slowdown In Macau

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MGM Resorts (NYSE:MGM) will report its Q1 2015 earnings on May 4th. 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 37% in gaming, Las Vegas Strip gaming declined less than 1% during the first quarter. [1] [2] Its not just VIP gaming in Macau that is facing headwinds, mass-market gaming revenues also declined around 27% in the first quarter. [3] Accordingly, we expect MGM to post lower revenues and EBITDA as compared to the prior year period.

Wynn Resorts (NASDAQ:WYNN) recently reported its Q1 earnings, which came in at $0.70 per share as compared to $2.32 per share seen in the prior year quarter amid continued weakness in Macau (see – Wynn Posts Loss In Q1 Amid A Continued Decline In Macau Gaming). Wynn’s stock price tanked over 16% in trading following the results announcement. Other casino stocks also faced the selling pressure as well and MGM’s stock plunged 6% in the down draft. However, MGM derives a significant portion of its revenues from non-casino operations and we expect continued growth in this segment. The company will likely post around 3% growth in hotel RevPAR (revenue per available room) for the first quarter.

We estimate gross revenues of about $10.45 billion for MGM Resorts in 2015, with EPS of $0.33 which is in line with the market consensus of $0.10-$1.01 , compiled by Thomson Reuters. We currently have a $27 price estimate for MGM Resorts, which is more than 20% ahead of the current market price.

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See our complete analysis for MGM Resorts International

Macau Slowdown To Weigh On Earnings But Las Vegas Hotels Likely To See Steady Growth

We estimate that the Macau operations contribute more than 30% to MGM’s stock value. The Macau casinos continued to face headwinds from declining volumes. The primary reason for this drop is the government’s anti corruption crackdown. A wave of high-profile arrests of senior Chinese officials has hurt the VIP business of Macau casinos. Visa transit restrictions and a smoking ban added to the woes for casino operators in the region. Also, Beijing wants Macau to diversify its economy, largely dependent on gambling, which accounts for 80% of the local government revenues.

Looking at Las Vegas, the gaming situation remained weak during the first quarter. The Strip revenues declined over 9% in March while they were down less than 1% for the quarter. [2] Accordingly, we don’t expect any significant growth in the company’s casino operations in the U.S. In the previous quarter, casino revenues grew 5% due to a higher volume and hold percentage. [4] It will be interesting to see how the hold percentage trends in the first quarter. Any strength in the hold percentage will aid the overall growth in casino revenues.

However, the company derives a significant portion of its revenues from non-gaming sources. The U.S. hotels business alone accounts for more than 35% to the company’s value, according to our estimates. We expect to learn of steady growth in its hotels operations for the first quarter, which likely benefited from the higher convention mix as well as higher rates. The convention mix stood at record 17% in the previous quarter and we expect similar levels in the first quarter as well.

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Notes:
  1. Macau Casino Bonds Slump as Xi Preaches to Wynn on Diversifying, Bloomberg, Apr 9, 2015 []
  2. Gaming Revenue Report, Nevada State Gaming Control Board, Month Ending March 31, 2015 [] []
  3. Mass-market Macau GGR falls 27 pct in 1Q 2015: govt, GGR Asia, Apr 17, 2015 []
  4. MGM Resorts’ SEC Filings []