Here Are The Biggest Takeaways From MGM’s Q3

by Trefis Team
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MGM Resorts (NASDAQ: MGM) reported better than expected Q3 results on October 30, comfortably beating consensus estimates. The strong performance was largely due to contributions from two new resorts – MGM Springfield and MGM Cotai. Revenues in the quarter came in just over 7% higher than the year ago period, while diluted earnings per share came in at 26 cents (flat y-o-y). MGM’s domestic revenues fell by about 1.5% y-o-y to slightly over $2.23 billion, largely due to a tougher year-on-year comparison – due to increased visitation from the blockbuster McGregor v. Mayweather boxing match last year – a slowdown in visitations, lower occupancy rates (down 2% y-o-y) and RevPar (down 4% y-o-y), partially offset by strong performance of MGM Springfield. Much of the revenue growth came from Macau, largely driven by robust growth in both mass market and VIP games. Macau revenue was up nearly 37% year-on-year to just over $606 million, forming nearly 20% of the company’s net revenues.

The opening of NoMad, and Eataly later this year, coupled with increased conventions, should improve MGM’s gaming and non-gaming services in the domestic market in Q4. However, we expect to see some pressure in its domestic operations in Q4, driven by increased expenses of surrounding its newly opened MGM Springfield resort, renovation of Park MGM, and further time required to recover at Mandalay Bay. Additionally, MGM’s multi-year partnership with NHL and NBA should further boost its gaming revenue and provide decent medium term growth opportunities. Further, MGM’s recently signed deals with Ladbrokes and Boyd Gaming give the company a strong foothold in the sports betting market and should provide decent long-term growth opportunities.

We have updated our model – cutting our price estimate for MGM Resorts slightly to $35, which is still significantly higher than the market price, based on the expected performance of the industry. Our interactive dashboard analysis on MGM’s Performance In Q3 And Expectations For 2018 details our expectations for the company. You can modify the different driver assumptions, and gauge their impact on the company’s earnings and valuation.

Factors That May Have An Impact In The Upcoming Quarters
Macau continued its strong performance in Q3, as revenue improved as a result of robust growth in casino revenue. This was largely due to increased VIP visitations at MGM Macau and robust Mass visitations in the recently opened MGM Cotai. However, the operating margins decreased by nearly 600 basis points to 21.5% due to MGM Cotai not yet attaining normalized business operations. Despite the slowdown in gross gaming revenues (GGR) – as a result of hurricanes, a weak VIP market, and slowing Chinese economy sentiment – the Cotai strip witnessed strong traffic and higher occupancy rates, driven by the most recent addition of MGM Cotai. Further, the proposed opening of two VIP junket rooms in MGM Cotai, coupled with the opening of the President’s Club – an exclusive gaming arena for premium mass market customers – later this year should boost Q4’18 revenue and provide for a decent growth opportunity. We expect Macau to contribute significantly to MGM’s growth in 2018, since the gross gaming revenues (GGR) in the region grew consistently for the 26th straight month in September 2018. Further, we expect the holiday season in Q4 to drive MGM’s full year results. In addition, the various new infrastructure developments in Macau should boost the mass market business for the company. Additionally, the proposed opening of three additional VIP junket rooms in MGM Cotai by early 2019 and the opening of The Mansion before Chinese New Year should boost its 2019 outlook and provide significant growth.
 
Domestic resorts contribute nearly 75% of the company’s overall revenue, and saw its revenue fall by slightly over 1% to $2.23 billion in Q3’18. This was largely due to the slowdown in visitations, which impacted the company’s Hotel and Other revenue on a comparable basis. Despite the slowdown, MGM saw decent growth in Table games and Slot revenue on a comparable basis – except Las Vegas casinos – which saw a 3% revenue decline on a same-store basis. Stronger than expected citywide conventions in Q4’18 should drive domestic resorts to grow in mid single digits. Further, the recently opened MGM Springfield should boost Q4’18 revenue. However, we expect the Park MGM casino transformation, which is expected to be completed by year end, should likely impact its Q4 margins. We expect the domestic market to remain the driving force led by several citywide conventions, the recovery in the Vegas market – owing to recent tax cuts and higher customer spending – and its expansion into Massachusetts. Moreover, we expect the legalization of sports gambling and above mentioned strategic partnerships to boost its domestic operations.
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