Why MGM Resorts’ Stock Has Lost A Third Of Its Value Despite Upbeat Revenue Growth

by Trefis Team
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MGM Resorts (NYSE: MGM) has a highly leveraged balance sheet with a long-term debt nearly twice the company’s market capitalization – much higher than that for its peers, Las Vegas Sands and Wynn Resorts. As the coronavirus crisis has lowered revenue growth expectations, MGM Resorts’ stock tanked from the growing pile of long-term obligations despite the multiple sale-leaseback transactions last year. As a result, the stock is down from $27 at the beginning of 2017 to below $18 now despite revenues soaring 35% over the same period.

Trefis compares the historical trends in MGM Resorts’ revenues, margins, and valuation multiple with its stock performance in the interactive dashboard, Why Is There A Mismatch In MGM Resorts’ Revenues And Stock Price Movement?

 

Over the last three years, MGM Resorts has expanded its Regional and International presence

In 2018, MGM Resorts augmented its presence in Macau with another venue, MGM Cotai, and doubled its gaming arena, including tables and slots. Regionally, the company also expanded its presence outside Las Vegas with prominent venues including MGM Springfield in Massachusetts and Empire City Casino in New York. Therefore, the growing geographical diversity swelled the company’s long-term obligations (debt and operating leases) by 20% from $12.7 billion in 2017 to $15.2 billion in 2019. While the long-term debt now stands at $11 billion (lower than 2017), rental obligations associated with sale-leaseback transactions will continue to weigh on margins over the coming months – especially in light of the expected pressure on revenues.

Suspension of dividends and share-repurchases have hurt investor sentiments

In the past three years, MGM Resorts has returned $784 million as dividends to shareholders and repurchased $2.6 billion of common stock. After the launch of the business optimization program, MGM 2020, the company targeted a $200 million increase in EBITDA by the end of 2020. However, the company’s EBITDAR margin (because of restructuring in 2019) slipped due to lukewarm growth at Vegas properties. In fact, the EBITDAR margin of Las Vegas Strip Resorts fell from 30% in 2018 to 28% in 2019 while it improved in other regions. With the suspension of dividends and net margins remaining razor-thin, investors lose out on near-term returns on their investment as well as long-term capital gains (In 2019, the company-wide EBITDA margin of Las Vegas Sands and MGM Resorts was 40% and 23%, respectively).

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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