MGM’s Q2 Earnings Preview: Watchout For RevPAR Growth At Las Vegas Hotels

MGM Resorts (NYSE:MGM) will report its Q2 2015 earnings on August 4th. ^[1] While the company will continue to face the headwinds at Macau, it should post steady growth in its domestic operations, primarily led by the Mayweather-Pacquiao event. The boxing event was very successful for MGM and it surely aided non-gaming as well as gaming operations at its Las Vegas properties. Looking at Macau, the overall market witnessed a 37% decline in gross gaming revenues. Macau continues to face the heat even after 13 straight months of decline amid the government’s crackdown on corruption, which has not only kept VIPs away from Macau but also weighed on the mass-market gaming. However, of late there have been a few positive developments for the casino industry, such as a relaxation of visitation rules to Macau and an uptick in gaming in the last week of June. Given these developments and the supportive measures from Beijing, we believe gaming in Macau maybe at a cusp of rebounding.

See our complete analysis of MGM Resorts’ stock here

Macau Slowdown To Weigh On Earnings But Domestic Operations Likely To See Steady Growth

We estimate that the Macau operations contribute more than 30% to MGM’s stock value and continued weakness in the world’s largest gambling hub will surely be a drag on MGM’s earnings. The Macau casinos continued to face headwinds from declining volumes. The primary reason for this drop is the government’s anti corruption crackdown, which started last year and it has primarily hurt the VIP business of Macau casinos. While visa transit restrictions also contributed to the fall, Chinese government recently relaxed the visitation rules to Macau. Mainland Chinese residents can now visit Macau twice per month rather than the prior twice per two-month period and the maximum length of any one stay has also increased from five days to seven days. ^[2] This is important as Mainland China visitors account for around 70% of the total visitation in Macau. Another concern for casinos was the smoking ban and there were reports last week that the government may ease plans to ban smoking rooms on gaming floors. ^[3] After several months of pain in the industry, there is some positive development from Beijing for Macau and we wonder if this could bring the much awaited recovery in the market.

Looking at Nevada, the gaming situation remained stable during the first half of 2015. There was a 0.6% uptick in revenues across the state, while the Strip saw a 1.4% decline. It must be noted that these figures are skewed due to June data, which came in 16% lower for the Strip, primarily reflecting tough comparison with the prior year period. ^[4] June 2014 saw an unusual 155% jump in baccarat revenues and a decline this year was very much expected. Having said that, we expect there was a slight pickup in MGM’s gaming revenues at its Las Vegas properties during the June quarter. MGM hosted the Mayweather-Pacquiao boxing match in Vegas and the event was a massive success. The event led to higher rates and occupancy at the Strip hotels and likely aided MGM’s casino revenues as well due to higher footfall. MGM in its previous earnings call stated that it should see a 5% RevPAR (Revenue Per Available Room) growth in the June quarter. ^[5]

Overall, the company’s non-gaming operations are expected to do well and help offset some of the losses seen on the Macau gaming front. We currently estimate gross revenues of about $10.45 billion for MGM Resorts in 2015, with EPS of $0.33, which is below the mid-point of the market consensus of $0.10-$1.01 as compiled by Thomson Reuters. We currently have a $23 price estimate for MGM Resorts, which is around 25% ahead of the current market price. We will update our price estimate after the second quarter earnings announcement.

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1. MGM Resorts’ Press Release [↩]
2. Macau gaming revenue falls again, but visitation rules eased, Las Vegas Review Journal, July 1, 2015 [↩]
3. Macau Casinos Surge on Report Government May Soften Smoking Ban, Bloomberg, July 13, 2015 [↩]
4. Baccarat results send state, Strip gaming revenue downward, Las Vegas Review Journal, July 28, 2015 [↩]
5. MGM Resorts International’s (MGM) CEO Jim Murren on Q1 2015 Results – Earnings Call Transcript, Seeking Alpha, May 4, 2015 [↩]