MGM Resorts International (MGM) Last Update 8/5/21
Related: WYNN LVS H
% of Stock Price
Revenue
Gross Profits
Free Cash Flow
MGM Resorts International
$39.79
Yours
Trefis Price
N/A
$44.95
Market
 
Top Drivers for Period
Key Drivers
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RECENT NEWS AND ANALYSIS

Potential upside & downside to trefis price

MGM Resorts International Company

VALUATION HIGHLIGHTS

  1. Las Vegas Non-Casino Operations (U.S. Hotels, Food & Beverage, Las Vegas Entertainment, Retail and Other) constitute 37% of the Trefis price estimate for MGM Resorts International's stock.
  2. Regional Casino Operations constitute 27% of the Trefis price estimate for MGM Resorts International's stock.
  3. MGM China Casino Operation constitutes 15% of the Trefis price estimate for MGM Resorts International's stock.

WHAT HAS CHANGED?

• After surpassing pre-covid levels in June, the shares of MGM Resorts have observed slight correction due to continued weakness in Macau, resurgence of infections in the U.S., and a broader downtrend in sports betting stocks.

• The company’s long-term focus is on expanding presence in Asia and attaining a sizable market share of the domestic sports betting & iGaming industry. While the strategic direction is likely to result in revenue and earnings growth, the near-term slump in discretionary spending is a drag on the company’s finances.

• MGM Resorts highlighted in its investor presentation that it is targeting a 20-25% share of the U.S. sports betting and iGaming industry.

• However, the presence of multiple sports betting applications including FanDuel, Draft Kings, and Penn’s Barstool is likely to weigh on BetMGM's long-term growth.

• MGM Resorts ended FY2020 with $5.2 billion of revenues and $1 billion of net losses.

• Interestingly, the company’s long-term liabilities barely increased during the pandemic assisted by a variable bottom line. The long-term debt increased by just $1.2 billion from $11.1 billion in FY2019 to $12.3 billion in FY2020.

• With the progress in mass vaccination and a likelihood of revenge tourism, we expect MGM Resorts’ top line to observe strong growth during the second half of 2021.

POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE

Below are key drivers of MGM Resorts value that present opportunities for upside or downside to the current Trefis price estimate for MGM Resorts:

Macau Casinos

  • MGM Macau Casino Revenues: MGM Macau casino revenues have increased considerably in the recent past. It grew from $1.5 billion in 2011 to $3.2 billion in 2014. However, revenues declined to $1.69 billion in 2016 due to the anti-graft measures from Beijing. They improved slightly to $1.75 billion in 2017 as a result of improvement in main floor table games, partially offset by a decline in VIP revenue. In 2018, this figure further rose to $2.32 billion, primarily due to robust growth in both VIP and Mass market driven by MGM Cotai, slightly dampened by a below-average performance at MGM Macau. Macau is the largest gambling hub in the world, with annual gaming revenues of close to $37.6 billion in 2018. We expect MGM’s Macau casino revenues to increase to over $4.8 billion by the end of our forecast period. This growth will be driven by MGM’s new casino resort in the Cotai region. The new resort will enhance MGM’s capacity in Macau and increase its market share. MGM expects its Macau revenues to double after the opening of the Cotai resort. If Macau market rebounds and gaming volume grows at a higher than expected rate, it could result in an upside of over 7% to our price estimate for MGM. Here, we assume MGM Macau casino revenues to reach $5.8 billion by the end of the forecast period. In a bearish scenario, assuming that the Macau Casino industry starts witnessing slow growth and MGM’s revenues remain under $3.1 billion by the end of the forecast period, there could be a downside of approximately 13% to our estimate for MGM’ stock. We believe the increasing population of Chinese high net worth individuals (HNIs) and the various infrastructure development are likely to be the stimulating factors for future growth.

Las Vegas Hotels

  • Average Daily Rates for Las Vegas Hotels: Average Daily Rates for MGM Hotels in Las Vegas declined from $161 to $108 between 2007 and 2010. The decline was accentuated due to the economic recession and consequent decrease in consumer discretionary spending. Besides this, the growth in the Asian gaming industry also accentuated the decline in Average Daily Rates. The growth in the gaming industry of Macau and Singapore adversely affected the gaming industry in Las Vegas. However, since 2010, ADR started to recover and stood at $160 in 2017. In 2018, ADR grew marginally to $161. In case, the U.S. economy grows faster than anticipated, and the Las Vegas gaming industry gains momentum, we believe there could be a potential upside of around 10% to the Trefis price estimate. This is assuming that Average Daily Rates reach around $224 level by the end of the Trefis forecast period. However, a sluggish recovery in the U.S. and higher hotel vacancy rates could pressurize Average Daily Rates and pose more than 10% downside to the Trefis price estimate. This scenario will occur if Average Daily Rates remain range-bound under $163 by the end of the forecast period.

For additional details, select a driver above or select a division from the interactive Trefis split for MGM Resorts at the top of the page.

BUSINESS SUMMARY

MGM Resorts International (MGM) is a holding company engaged in gaming, hospitality, and entertainment. It primarily owns and operates casino resorts that include gaming, hotel, dining, entertainment, retail, and other resort amenities in the U.S. and Macau.

Its Las Vegas strip operating properties include Bellagio, MGM Grand Las Vegas, Mandalay Bay, The Mirage, Luxor, Excalibur, New York-New York, and Monte Carlo. MGM also has operating properties in other U.S. states: MGM Grand Detroit in Michigan and Beau Rivage and Gold Strike in Mississippi.

SOURCES OF VALUE

We believe that Macau operations are the primary source of value for MGM because:

Significantly Higher Volume Than Las Vegas Casinos

Macau offers significantly high gaming revenues as compared to the Las Vegas Strip. Macau gaming revenues are about five times higher than that of the Las Vegas Strip. In 2018, gaming revenues at Las Vegas Strip were $7.24 billion as opposed to $37.6 billion in Macau. This significant difference is due to the very high demand for gambling in Macau, which is also the only place in China where gambling is legal. A lot of tourists from nearby countries visit Macau for gambling. The casino business is primarily divided into two categories in Macau, VIP gaming, and mass-market gaming. VIP gaming offers high volume, but lower casino hold percentage while mass-market gaming offers high hold percentage. The volume of mass-market gaming is picking up in Macau and will benefit MGM. MGM itself is developing another casino resort in the region. The new resort will further enhance MGM’s capacity in Macau and drive growth in the coming years.

Higher Proportion of Non-Gaming Revenues In Revenue Mix Compared To Competitors

MGM Resorts offers a complete resort experience to its guests, including high-quality non-gaming amenities such as food and beverages, entertainment, retail outlets, beauty salons, spas, and shows. The firm’s dependence on gaming revenues is comparatively lower compared to its competitors. Non-gaming revenues do get affected by the growth of gaming revenues as the majority of gaming customers utilize non-gaming/ancillary services offered at resorts. However, we believe that the firm’s non-gaming services do attract a large number of convention/show attendees and general tourists, apart from gaming tourists.

KEY TRENDS

Macau Gaming Rebound

Macau gaming industry started to rebound starting mid-2016 and grew by nearly 19% in 2017. This tailwind continued into 2018, as the gaming industry grew by about 14%. However, before 2016, the region’s gross gaming revenues were declining at a very high rate. The primary reason for this drop was the government’s anti-corruption crackdown. A wave of high-profile arrests of senior Chinese officials has hurt the VIP business of Macau casinos as they preferred to maintain a low profile. Furthermore, the weakening economy added to the woes of casino operators in the region. Moreover, Beijing wanted Macau to diversify its economy, largely dependent on gambling, which accounts for a significant portion of the local government revenues.

The overall gaming market in Macau is expected to sustain its growth momentum in 2019. However, MGM may lose its market share to Las Vegas Sands, and Wynn resorts as its Cotai project recently opened in Q1’18. Other casinos, including Las Vegas Sands and Wynn Resorts, opened their new casinos on the Cotai strip in the third quarter of 2016.

Las Vegas Gaming Market Growth Slowing Down

The economic recession of 2008-2009 slowed down the growth of the Las Vegas gaming industry. Other factors mentioned below also accentuated the slow down:

Other U.S. states like Pennsylvania and Delaware recently legalized table games. Similar actions by other states could affect the number of tourists visiting Las Vegas. More than 80% of the tourists visiting Las Vegas are domestic. The Las Vegas gaming market has reached a saturation state. Casino operators indulge in intense competition to sustain their margins. Intense competition is affecting the industry margins.

Excess room capacity hitting the markets is expected to pressurize the margins of the gaming industry by pushing average daily rates down. Furthermore, Asian tourists prefer Macau to Las Vegas as a result of two things: firstly, it offers world-class gaming infrastructure since the advent of foreign gaming companies in Macau in 2006, and secondly, it is at a nearby location. The decline in the number of Asian tourists would also affect the Las Vegas gaming industry.

Increasing Share Of Asia Casino Revenues

MGM Resorts operations are not geographically diversified. It operates mainly in the U.S., particularly in Las Vegas. It does have a presence in Macau through its joint venture investment, MGM Macau. However, its presence in Macau is on a smaller scale compared to its competitors. However, MGM’s new Cotai resort will boost its market share in the Macau casino industry.

Wynn Resorts and Las Vegas Sands have been focusing their efforts on Asia for future growth. LVS had opened Marina Bay Sands in Singapore and has built Cotai Central in Cotai. It is further developing The Parisian casino resort in Cotai. The following factors strengthened the trend mentioned above:

Macau surpassed the Las Vegas Strip as the world’s biggest gambling hub in 2006 after the government allowed the entry of overseas casino operators. Since then, the region has witnessed unprecedented growth. In 2018, the region collected $37.6 billion in gaming revenues, significantly higher than the gaming revenues collected on the Las Vegas Strip.

Other upcoming regions within Asia, like Japan and Singapore, also offer immense growth potential for the casino industry. Japan is currently considering the legalization of casinos. A strong Chinese economy with a burgeoning middle class and an increased population of high net worth individuals is expected to strengthen Macau’s gaming industry. Macau and Singapore offer world-class gaming infrastructure. All major gaming companies like Melco Crown, Wynn Resorts, and Las Vegas Sands have their presence in Macau.

Key Infrastructural Initiatives Underway

The Macau government is reinforcing a series of initiatives in order to drive visitor growth in the region. The gaming industry is a key contributor to Macau’s GDP. The government is investing in new transportation links to ease travel for Chinese visitors. It should be noted that most of the tourists visiting Macau are from Mainland China.

The Guangzhou-Zhuhai high-speed railway is expected to improve travel time from Guangzhou to Macau to 40 mins, down from the 2+ hours taken by bus. The Macau Light Rapid Transit will link ferry terminals and key locations. It will have 12 stops on the Macau peninsula, 11 stops on Cotai and Taipa, and will fully integrate different regions within Macau.

Also, the Hong Kong-Zhuhai-Macau bridge, which opened in October 2018, will connect Hong Kong to Macau, thereby, reducing car travel time from 4 hours to 40 minutes. This should further drive Mass market visitations. The Macau International Airport is presently undergoing capacity upgrades. Its capacity will be increased to handle 10 million people per year from the current capacity of 7.8 million people. This project is expected to get underway in early 2019.