Are Odds In Favor Of MGM Resorts?

[Updated 02/07/2022]

MGM Resorts stock (NYSE: MGM) has retained its valuation despite a downtrend in the conventional casino and the nascent sport betting industry. Notably, the shares of MGM’s immediate competitors, including Las Vegas Sands and Wynn Resorts, are trading 30% below the highs observed in March 2021. In a recent business update, MGM Resorts highlighted BetMGM’s strong market share of 20-25% in the U.S. sports betting and iGaming market, with expectations of $850 million of net revenue in FY2021. The U.S. sports betting and iGaming market is slated to reach $40 billion at maturity. Given stiff competitive rivalry from multiple applications, the bottom-line is likely to observe downward pressure. We highlight the quarterly trends in revenues, earnings, stock price, and expectations for Q4 2021 in an interactive dashboard analysis, MGM Resorts Earnings Preview.

Below you’ll find our previous coverage of MGM stock where you can track our view over time.

[Updated 01/07/2022] – Speculating On MGM Resorts? This Stock Could Provide Better Gains

The shares of MGM Resorts (NYSE: MGM) have gained $6.5 billion in market capitalization over February 2020 levels assisted by its sports betting application BetMGM and a possibility of a favorable regulatory outcome in Macau. The shares of Penn National Gaming (NASDAQ: PENN) have gained $2.1 billion in market capitalization over the same period driven by the success of its sports betting application Barstool. However, the sports betting industry has been observing a broad-based correction including Penn National in recent months over concerns of high competitive rivalry. In our earlier article, Penn Stock Poised For Long Term Gains?, we highlight the potential upside in Penn stock considering Barstool’s targeted 15-20% share of the sports betting market. MGM Resorts and Penn National are pursuing a similar strategy of increasing presence in the $40 billion sports betting and iGaming market. We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis, MGM Resorts vs. Penn National Gaming: Industry Peers; Which Stock Is A Better Bet?

1. Revenue Growth

Penn National’s growth was much stronger than MGM Resorts before the pandemic, with PENN’s revenue expanding at an average rate of 20% per year from $3 billion in 2016 to $5.3 billion in 2019, versus MGM Resorts’ revenues which grew at an average rate of 11% per year from $9.5 billion in 2016 to $12.9 billion in 2019. Due to mandated closures and subsequent restrictions, MGM Resorts and Penn National Gaming reported a 60% and 30% top-line contraction in 2020, respectively.

• Penn National’s key services including gaming, food & beverage, hotel, racing, and other contribute 81%, 10%, 6%, 1%, and 3% of total revenues, respectively. The company’s strong growth was driven by multiple acquisitions in recent years. Notably, the company earns nearly 90% of gaming revenues from slot machines which have a casino win rate of 7%.
• Penn remains committed to the long-term success of its sports betting application Barstool in the coming years. While Barstool currently contributes less than 1% of the total revenues, its share is expected to reach a meaningful level by 2023.
• MGM Resorts’ Macau, Vegas, Regional (U.S.), and Other segments contribute 22%, 45%, 28%, and 5% of total revenues, respectively. Along with a strong domestic presence, the company is gaining traction in the nascent sports betting and iGaming space.
• Notably, MGM’s diversified presence has been a boon for the stock in recent months as increased regulatory oversight and proposed changes in Macau’s gaming law spooked investors. With an integrated resort in Japan, the company is slated to further diversify its business portfolio.

2. Returns (Profits)

Coming to returns, MGM Resorts and Penn National have been reporting similar operating profit margin in recent years. In 2019, MGM and Penn reported an operating profit margin of 10% (excluding the impact of property sales) and 11%, respectively.

• In 2019, MGM Resorts reported $12.9 billion of net revenues and $1.8 billion of operating cash flow – an operating cash flow margin of 14%. The company returned $270 million as dividends and purchased $1 billion of common stock.
• Similarly, Penn National reported $2.3 billion of total revenues and $704 million of operating cash flow at an operating cash flow margin of 30%. The company utilized $608 million of operating cash on property, plant & equipment, and acquisitions. The operating cash flow margin observed a jump in 2019 largely due to impairment charges. (related: Will Tides Turn For Las Vegas Sands Stock?)

3. Risk

In 2019, MGM Resorts reported $15 billion of long-term debt and operating lease liabilities, $12.5 billion of total equity, and $33 billion in total assets. Whereas, Penn National reported $11 billion of long-term debt, $3 billion of total equity, and $16 billion in total assets. Considering the debt-to-equity ratio, MGM Resorts has lower financial leverage than Penn National Gaming.

• Despite a prolonged slump due to the coronavirus crisis, both companies did not incur sizable impairment charges in 2020.
• While higher financial leverage leads to higher cash burn during a downturn, MGM’s cost control measures limited operating cash burn to $1.5 billion and Penn National generated $339 million in 2020.
• Comparing MGM’s $13 billion in revenues with Penn National’s $5.3 billion, Penn’s nearly comparable long-term debt obligations are likely to be a drag on shareholder returns due to interest expenses.
• Importantly, Penn expends almost 92% of its operating income on interest costs.

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[1] Month-to-date and year-to-date as of 2/7/2022
[2] Cumulative total returns since the end of 2016

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