How MGM Plans To Balance Business Expansion And Short-Term Return on Investments

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MGM Resorts International (NYSE: MGM) has grown its domestic and international presence significantly in the last few years, with many new projects and acquisitions. However, expanding business requires significant capital expenditures, and major global casino operators faced tough times when Macau gaming industry started to decline due to the corruption crackdown by the Macau government. However, MGM’s returns to investors have been higher that its rivals primarily due to its broader presence in Las Vegas and other parts of the United States. With the legalization of the casino in Japan, MGM is likely to invest significantly in the region. However, this raises the question of how MGM will return capital to its investors if it decides to invest there. We believe that MGM’s recent projects and acquisitions, improved margins in the last few years, as well as a recovery in the Macau gaming industry will produce the right mix to keep investors happy as MGM continues its expansion plans.

MGM Expanding Its Domestic and International Presence

MGM’s revenue contribution from its U.S. regional operations (other than Las Vegas) has increased from 12% in 2014 to 27% in 2016. This was a result of MGM’s continuous expansion in domestic resorts since 2014, and it helped MGM withstand the pressure in Macau in 2015-16. Since 2014, MGM completed multiple projects in the U.S. including its $2.2 billion investment in City Center resort, T-Mobile Arena, and the Borgata acquisition. In addition, MGM completed two new projects, Park Theater and the $1.3 billion MGM National Harbor resort, in December 2016. The current projects in MGM’s pipeline include MGM Springfield and MGM Cotai, which is expected to open in the second half of 2017. It can be concluded that MGM has expanded its businesses globally while delivering the highest returns among most of its peers.

However, this also presents a question among MGM’s investors, as MGM does not appear likely to slow down its expansion in the foreseeable future. With the likelihood that the company will invest heavily in Japan – which is projected to be the second-largest casino market after Macau – there is a chance that these investments could put pressure on near-term cash flows.

Macau Recovery And Domestic Resorts Expansion To Drive MGM’s Short Term Growth 

MGM’s Q4’16 revenues saw growth, but that was primarily due to gains from the Borgata acquisition. However, MGM may see increased organic growth in the coming quarters due to the following reasons:

  • MGM’s T-Mobile arena, which has about 20,000 seats, has more than 100 events scheduled for 2017, which should boost its domestic revenues.
  • MGM’s Park Theater has yearlong programs scheduled by singers such as Bruno Mars, Ricky Martin, and Cher in 2017.
  • MGM’s margins for domestic resorts in the U.S. have grown from about 24% in 2014 to about 30% in 2016. In Macau, despite the downturn in the gaming industry in 2015-16, MGM was able to expand margins. We believe that these margins will grow further as Macau gaming is seeing a recovery.
  • MGM’s National Harbor was opened in December 2016, averaging about 22,000 visitors a day and, based on January and February data, it has achieved an average market share of about 30% in Maryland.
  • The Borgata acquisition was completed in Q3’16 and added about $386 million to MGM’s Q4 revenues. We expect that this will continue to boost MGM’s revenues in the coming quarters.
  • Macau’s gaming industry has started to recover, seeing double-digit growth for the last 3 months. This is also likely to improve MGM’s revenues from the region. Additionally, the opening of MGM Cotai in the second half of 2017 will further increase MGM’s market share in the region and generate greater revenues from Macau.

Thus, although there are some concerns about MGM’s Japan bid, we believe that it should still be able to maintain strong earnings and capital returns.

See our complete analysis of MGM Resorts International.

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