MGM’s Big Lay Off: Should You Buy Or Sell?

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MGM: MGM Resorts logo
MGM
MGM Resorts

Should you be worried that MGM Resorts International (NYSE:MGM) recently laid off nearly 25% of its workforce? The short answer is no! On one hand this signals prolonged weakness in the casino and gaming market. But on the other hand, it also means significant support to MGM’s bottom line from a decisive management action to protect shareholder value. Second quarter saw a 95% drop in MGM’s revenue, resulting in nearly $1 billion in loss. Much of it came from administrative and corporate overhead which means that layoffs will go a long way in stemming losses. To add to that, the company has sufficient liquidity as we argue in our dashboard Does MGM Resorts International Have Enough Liquidity To Survive Covid-19 Demand Shock? Finally, there is much market value to be unlocked as the demand starts recovering. Why? Simply because even prior to Covid-19, MGM had shown consistent revenue growth and improved its EBITDA margin, but the stock didn’t seem to fully appreciate this improvement. It could possibly be a good time to invest. Our dashboard What Factors Drove -25% Change In MGM Resorts International Stock Between 2017 And Now? summarizes what has driven the company’s stock price in the last 2-3 years, and gives a snapshot of its financial performance.

Long-Term Recovery Could Be Good

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As demand recovers, the market will recognize MGM’s value that stems from its strong market position and consistent growth (Covid-19 apart). MGM Resorts International revenue increased from $10.8 billion in 2017 to $12.9 billion in 2019, implying a 19.5% increase in two years. During the same time, its EBITDA Margin increased from 25.3% to 40.9%. Despite this, its stock barely moved from 2017 levels. Now that it is down even further, thanks to the complete travel halt due to the pandemic, it may present an upside opportunity for those willing to wait until the demand recovers.

Liquidity Perspective

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. At the end of June 2020, the company had nearly $11.3 billion in long-term debt and $4.8 billion in cash. Sure, the liquidity position has deteriorated compared to what it was at the end of Q1, but the company is still in a comfortable zone especially considering the recent moves.

So, MGM might be a good long-term bet. But, what if you’re looking for a more balanced portfolio instead? Here’s a top quality portfolio to outperform the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk. It has outperformed the broader market year after year, consistently.

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