Why MGM Resorts Has Downside Risk At $20

MGM Resorts’ stock (NYSE: MGM) has lost 44% of its value since the beginning of this year due to the temporary closure of its properties in Las Vegas, Macau, and other destinations. After the easing of restriction measures, the company has planned a partial re-opening of a few Las Vegas Strip resorts. While the economic recovery from the crisis hinges on the containment of the coronavirus spread, we believe that MGM Resorts’ stock is fairly valued and has a low upside potential due to the trailing valuation multiple (EV/EBITDA) of 8.5. The company sold Bellagio, MGM Grand, Mandalay Bay, and Circus Circus last year at an average valuation multiple of 8.13. Our dashboard Why MGM Resorts Stock moved -42% highlights the historical trends in revenues, margins, and stock price. We discuss more below.

Despite a series of new property openings including MGM Cotai, MGM Springfield, and Empire City Casino in the last two years, MGM Resorts stock has remained fairly level, trading within the $25-$33 range primarily due to a surmounting debt load. In fact, the company’s market capitalization of $10 billion currently stands lower than its long-term obligation of $15 billion, triggering fears of a downside even at $20. However, the company’s revenues increased from $10 billion in 2017 to $13 billion in 2019, supporting share buy-backs and dividend payouts. While the adjusted net margins have remained low from swelling interest expenses and one-time opening costs, the company repurchased $2.6 billion of its common stock at an average price of $30 and maintained a dividend yield of 2%. The recent decline in stock price can also be attributed to the company’s cash preservation measures, which has resulted in the temporary suspension of its capital return program. However, the restoration of share buy-backs and dividend payouts will provide an uptick to MGM Resorts stock.

So what’s the likely trigger and timing to this upside?

With 8.5 million people infected and 0.4 million deaths, the coronavirus crisis has affected the livelihoods of people across the world. Certain industries such as air travel, oil & gas, and apparel have been hit hard. However, improving recovery rates and easing lockdown measures will give an impetus to the stalling global economy. Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus.

Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a more complete macro picture. It complements our analyses of coronavirus impact on a diverse set of MGM Resorts’ peers including Wynn Resorts and Las Vegas Sands. The complete set of coronavirus impact and timing analyses is available here.

MGM Resorts’ valuation is negatively affected by a huge debt pile but, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

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