Deserted Resorts & Casinos: Does MGM Have Enough Cash To Survive?

The hospitality industry is one of the hardest hit, with demand falling more than 90%. Deserted casinos and resorts aren’t an uncommon sight right now. With the stock falling over 40% this year (as of June 24th), MGM Resorts International (NYSE:MGM) is one of the companies feeling the heat. It is a waiting game now, but does MGM have enough liquidity to survive till the demand recovers? How vulnerable is it? We answer these questions on our dashboard Does MGM Resorts International Have Enough Liquidity To Survive Covid-19 Demand Shock, which examines the company’s cash flow generation ability, resilience of cost structure, and operational runway, and compares it to that of its peers. You’ll be surprised to know that despite a sharp demand drop, MGM is in a relatively better position compared to some of the distressed retail companies. It can absorb a massive -59% revenue decline before its operating income becomes negative. In addition, it can also generate positive cash flow after covering capital expenditures in a scenario where revenue falls by 30% for full year 2020, provided it can reign in its capex. In a no-demand scenario, it has nearly 8 months of operational runway.

MGM Margins And Cost Structure Can Allow It To Operate Profitably In Tough Times

MGM’s net income in 2019 stood at a healthy $2 billion on revenue of $13 billion. Breaking down the cost structure, we find that variable operating expenses stood $6.3 billion, accounting for 70% of operating expenses. As a % of revenue, the figure was 49%. Based on this we determine that MGM’s operating income will decline to the break-even point (no profit no loss) if 2020 revenue falls by -59% vs 2019. Its peers, while still comfortable, are at a slight disadvantage compared to MGM. The break-even revenue decline % figure for Vail Resorts, Churchill Downs, and Cedar Fair ranges between -45% and -47%. However, even at the break-even point, MGM still needs to cover its interest burden and capital expenditures. Therefore, the cash flow situation can look different.

How Is MGM’s Cash Flow Situation Looking If Demand Starts Recovering, Limiting Full Year Revenue Fall To 30%?

If demand returns to a healthy fraction of what it was before the pandemic by Q4, MGM’s resorts and casinos can begin operating in a phased manner with limited staff. In this scenario, we assume annual drop of 30% in revenue and 50% capital expenditure cut reflecting fiscal discipline. Assuming that MGM does not spend any cash on share repurchases, we find that the company is likely to report positive net income of $678 million on a revenue base of $9 billion, along with generating a small positive cash flow. Any additional revenue fall and we may be looking at a net cash outflow.

But here is what’s critical. Even if demand bounces back by Q4, there could be extremely lean months of little to no demand in between. MGM needs to survive it. How well is it positioned to do so?

Extreme Stress Test: MGM Has 7.9 Months Of Runway In Case Of No Demand 

MGM entered this year with nearly 7.9 months of runway in absence of any revenue/demand. While that was still much higher than what some of the distressed retail companies are looking at, MGM ensured enough liquidity to survive in case the demand recovery is delayed through debt raises, and improved this runway. It resorted to nearly $3.6 billion in drawdowns in the first quarter of this year, and raised an additional $750 million in new debt in early May 2020 purely to strengthen its liquidity as its long-term debt is not due until 2022. As of beginning of May 2020, the company had nearly $11.8 billion in long-term debt and $6 billion in cash.

Retail, hospitality, oil and automotive – all these industries are facing a demand crisis. Check out why this retail company is looking at significant debt raise to stay liquid.

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