MGM Resorts’ Q3 Earnings Preview: Expect Macau To Be A Drag On Earnings While Domestic Hotels RevPAR Growth Will Boost The Overall EBITDA

MGM Resorts (NYSE:MGM) will report its Q3 2015 earnings on October 29th. ^[1] Overall Macau gaming revenues declined over 34% during the third quarter as players continued to stay away from the world’s largest gambling hub amid government’s anti-graft measures followed by a weakening economy. Accordingly, MGM’s Macau operations will surely see a double-digit drop in revenues as compared to the prior year period. Looking at the Las Vegas Strip, the gaming picture doesn’t look encouraging either as revenues fell 2% in July and 5% in August amid lower baccarat volumes. ^[2] Having said that, the company’s hotel operations should do well as MGM expects a 6% RevPAR (Revenue Per Available Room) growth during the third quarter and this will likely boost the company’s overall EBITDA.

See our complete analysis of MGM Resorts’ stock here

MGM Will Continue To Face Headwinds From Macau Slowdown

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 Q3 earnings. The Macau casinos continued to face headwinds from declining volumes for 16 straight months. 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. Now given that Macau’s economy is heavily dependent on casinos, a slowdown in gaming led to a slower economy, which further added to the woes. The past quarter was again rough for Macau casinos due to concerns on a liquidity crunch for casino players, amid junket issues. Accordingly, MGM will also continue to face the headwinds at Macau and we currently estimate a 35% drop in Macau casino revenues and close to 30% drop in EBITDA for 2015. While many have been looking for a revival in the gaming market, it is difficult to state the timing of much-anticipated recovery in Macau. For now, we know that the gaming revenues have remained in a tight range for most of 2015 and this points towards stabilization, especially at the base mass gaming market. While we wonder what could be the catalysts that can bring in growth for VIP segment, mass-market may pick up growth sooner than later with rising tourist arrivals. And MGM stands to benefit in Macau, as it will significantly enhance its capacity with its new resort in Cotai, which has a potential to generate $1 billion in annual EBITDA (see – MGM’s Cotai Resort Has A Potential To Generate More Than $1 Billion In Annual EBITDA).

Domestic Operations Will Boost Overall EBITDA

Looking at the Las Vegas Strip, the gaming situation remained fragile in July and August amid lower baccarat volumes. It must be noted that the September figures are not yet released by the gaming commission. We thus don’t expect any significant uptick in gaming revenues but MGM’s domestic hotel operations likely did well during the quarter. MGM is seeing high convention mix at its Las Vegas properties and this is boding well for the company. MGM in its previous earnings call stated that it should see a 6% RevPAR growth in the September quarter. ^[3] This is an important segment for MGM and we estimate it accounts for more than 35% of MGM’s stock value. In terms of EBITDA, MGM’s hotel operations offer much higher margins of around 46% as compared to 15% for Las Vegas table games, according to our estimates. Accordingly, a continued growth in this segment is positive for the company and will help it offset some of the declines seen in Macau.

Overall, we expect MGM’s non-gaming operations to do well in the September quarter and help offset some of the losses seen on the Macau gaming front. We currently estimate gross revenues of about $9.65 billion for MGM Resorts in 2015, with EPS of $0.58, as compared to $0.53 compiled by Thomson Reuters. We currently have a $26 price estimate for MGM Resorts, which we will update after the third quarter earnings release.

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1. MGM Resorts’ Press Release [↩]
2. Gaming Revenue Information, Nevada Gaming Control Board [↩]
3. MGM Resorts International (MGM) James Joseph Murren on Q2 2015 Results – Earnings Call Transcript, Seeking Alpha, Aug 4, 2015 [↩]