• All engines firing across its verticals with covid and cyberattack behind it.
• Price resistance continues because investors remain unconvinced that the casino sector can reassume a strong growth pattern ahead.
• The company manages and executes its global reach well over time.

Premise: Last November 12 th we posted our view of the shares of MGM Resorts International (NYSE:MGM). The stock traded that day at $36.25. Based on our archived performance data on the gaming markets in which MGM was active, plus talks with our on the ground associates in all its markets, we put a PT of $47.85 to be reached by the end of January ’24.

At writing today, MGM is trading at $40.13

Our ongoing thesis was that the market had failed to discover the alpha here because overall sentiment in the sector had been tamped down by worries over macro discretionary spending ahead. But that was an over-simplification. We dug deeper, particularly with industry colleagues, to find a more specific rationale as to why the stock had not yet responded to the continuing good news out of all its geographic nodes.

We looked at MGM’s peers in the roaring recovery of the Macau market as an example. The shares of five of the six operators were down 20% since the end of China’s zero tolerance covid policy last January. Only MGM shares showed a puny 1% gain. That was clearly fueled by revenue spurts generated by the 198 additional tables officials had authorized for MGM China after the re-concession deals were approved.

A similar pattern has emerged in all of MGM’s business bases.

Las Vegas, U.S. regionals, and BetMGM all participated in the y/y upside across the board. The only way to get a very clear contextual sense of where the company has been and where it is headed is to begin with a revenue comparison to 2019. The 2020 through most of 2022 covid disaster has battered the sector all over the globe taking stock valuations down with revenues and fearful cash burn estimates.

That all changed as populations emerged from shutdowns and covid-related fears to rush headlong back to casinos all over the world. What was not clear even as revenues began recovery cycles, was whether they would ever return to the 2019 baseline levels. That prompted what I believe was a bearish overall outlook among investors. Gaming has always been a resilient sector come what may, particularly because of the growing numbers of consumers who each year comprise the growing sector of casino visitors.

There was also some belief among investors that one of the collateral damage truths that may have kept them out of the sector had been exacerbated unrealistically by the covid disaster. Several panels we conducted for clients on the issue was that the live attendance component of all consumer discretionary businesses like movie theater attendance or casino visits would never recover. That is partially why investor interest perked in verticals like streaming TV, online gaming and sports betting soared in the 2020-22 period.

These fears, at least for casino visitation, proved wrong.

What’s being missed in our view

Casino gaming is and has always been a business of bodies. Just looking at two of its biggest markets pre and post covid:

Macau: 2023 arrivals are tracking near 25m from a near dead stop just as the year began when zero covid damage was still evident. At the 2019 base year, Macau tracked 37m visitors. SAR authorities have forecasted that total visitation in 2024 will reach, if not exceed, 2019 numbers.

Revenue, which has recovered into a powerful y/y surge will take longer to recover since so much of 2019’s GGR came from the VIP sector. That segment has shrunk Macau’s mass, and as premium mass customer bases are expanding rapidly, but will take longer to reach 2019 baseline revenues. One top industry executive we spoke to whose property was a VIP junket leader sees a healthier industry ahead.

“We eliminated most junkets totally aware of the cost in revenues. But the mass and premium mass segments of play are so much more profitable. They are less complicated to manage and market. I think we’ll see revenue blow past 2019 by 2025 or before. The industry isn’t investing billions in forward capex just because its mandated by the new concession deal. We believe in the future of Macau. We could be looking at a market attaining US$50b in revenues before 2030.”

Las Vegas: On a 10- month basis to September, the Las Vegas strip has generated 34.1m visitors vs. 2019 39.5m for the entire year.

Commercial gaming revenue (U.S. non-tribal casinos) have reached $48,7b, a 10% increase y/y and the third consecutive year of total gains in casino win. According to AGA, approximately 26% of the total adult US population visit casinos at least once a year—that’s post covid.

The recovery is driven by many factors: the return of older slot play, the booming increase in blackjack play among millennials fueled by their sports book visits, the massive calendar of sports and entertainment events which have supported general tourism outside of conventions. But investor skepticism remains, with interest shifted to online stocks like DraftKings (DKNG) and Flutter/FanDuel (OTCPK:PDYPY). As a result we believe, sector leaders like MGM remain undervalued.

Above: The hit taken by MGM stock from the cyberattack has opened what we believe to be a solid entry point now.

MGM has participated in this rebound in spades

Sports fans might be familiar with the oft-quoted judgment of Bill Parcells, former head coach of the NFL NY Giants and Dallas Cowboys. We invoke it here as most appropriate to express our bull scenario as succinctly as possible. Our SA posts on gaming and entertainment stocks mostly turn on our appraisals of management skills and execution. Plowing through endless metrics can buttress suppositions of course. Many investors do believe that the only alphas discoverable are to be found in some esoteric metric that is hidden in the runes of mice type in earnings release filings. Sometimes it is true, other times finding so-called alphas can be putting up false flags.

Parcells: “You are what your record says you are…” The quote arose during extended give and takes between fans who did indeed use avalanches of stats to support the cases that proved their team was superior to rivals. Parcells closed the debate with that sentence. The ring of truth in it is too loud to fall on deaf ears. We think the case for MGM at its current price is made on: its record.

In July of 2020, not long after the resignation of MGM’s former CEO James J. Murren, the top job went to veteran MGM and industry executive, Bill Hornbuckle. He took over at the height of the covid disaster, bringing a long record of ground rooting gaming management skills and experience to the job. Quite simply, the company has grown in size and performance despite the incredible headwinds of COVID it had to endure.

Baseline 2019 MGM

Revenue$12.4b

Gross profit $3.2b

MGM TTM

Revenue: $15.3b

Gross profit: $7.3b

The mix of macro and industry wide cross-currents that impacted the operations of MGM during this period is wide:

COVID aftermath, market recoveries, property expansions property sales and acquisitions, sports betting cost pressures, capex investments, etc. Overall, the results have shown MGM management capable of meeting both tailwinds and headwinds with efficient operations and an expansive view of their long range goals of building a viable global footprint. This has produced in its wake, a debt profile we believe continues to turn off many investors. It may be part of why MGM shares do not get the valuation they truly warrant based on its post covid performance in all its nodes.

The MGM Debt profile is somewhat distorted by rent obligations

At writing, MGM is sitting on $6.531b in long-term debt, but in terms of its current ratio, 1.78, its falling inside a reasonable range. On top of this is $25b in long-term REIT lease liabilities generated over the last ten years as MGM’s strategy shifted to light assets via realty sales. Clearly, the base debt considered alone is no reason to bypass the stock. What really counts is how you perceive the lease obligations. They are, without question, debt, but in real-world terms, how should investors see that number relative to valuations?

Long-term lease obligations are not the same, as pure loans or bond debt in that its holders are REIT corporate entities not lenders or bond holders. The buildings are single-purpose. They cannot operate as anything but casinos. Even converted as pure hotels only, the ability to meet rent payments becomes questionable.

REIT leases have periodic escalators tied to performance or other metrics, but they are known and capped well in advance. Straight debt, on the other hand, can be subject to the moods of the FED and macro factors which can potentially drive the cost of refis ahead damaging EBITDA big-time.

Proof of the viability of casino properties leased to REITs is the track record of companies like VICI Properties (VICI), whose stock has performed admirably through many headwinds. This tells us that investors believe, that failing black swans, casino properties will always meet rent obligations.

Also, in selling off its realty, casinos get significant cash proceeds which bolster balance sheets immediately.

3Q23 result highlights foretell even better news ahead

MGM U.S. performance for 3Q23 was impacted by two events: the cybersecurity attack on its database in September, and the disposition of The Mirage Las Vegas and Gold Strike Property in Tunica. Vegas strip properties contributed $2.1b to the total group revenues.

Total group revenues hit $4b, up 16% y/y mostly driven by the surging recovery of MGM China. The two Macau properties revenue rose to $813m vs $87m y/y up 829%. Adjusted property EBITDAR was $220m vs a loss of ($70m)y/y.

EBITDAR margins grew from 24% to 27%.

Diluted income per share $0.46 vs a loss of ($1.45)y/y.

MGM has estimated the loss of the cyberattack at $100m which is expected to be covered by insurance. This is the primary factor that held the Vegas and regional casinos to essentially a flat y/y performance. Those headwinds will be gone in 4Q23. On that basis we have forecast total 2023 earnings to scrape close to if not meet $3,00 for the year.

MGM is among the leading candidates for one of three full-bore casino licenses to be issued for the metro New York market. If successful, it expects to expand its current Empire property just over the NYC line.

Above: MGM’s plan for a possible NY expansion does not include a hotel towner but focuses on maximum drive in amenities.

BETMGM

The company’s 50% owned sports betting platform has grown into an estimated 17% share of the U.S. sports betting market. Management guidance for the revenue year is $1.8b TO $2B with the expectation of its going EBITDA positive by the end of this year. MGM’s newly acquired LeoVegas EU business has made it the only U.S. casino operator with a global presence. We think the acquisition springs from MGM’s failed bid to acquire the 50% of BetMGM owned by UK giant Entain. For perspective on this, recall that competitor Caesars Entertainment (CZR) bought the UK betting giant William Hill for its U.S. business base and promptly sold off its global business to help finance the deal. MGM’s global ambitions are clear both in casinos and sports betting.

Japan update

Above: Initial site work began last week on the $10b Osaka property plan.

Since Japan’s approval of casino gambling in 2018, the road to an industry development has been pot-holed with political and cultural opposition. Nearly all major operators who had been early enthusiasts to bid for one of the three licenses to be issued have bowed out. Only MGM among global leaders had stuck to its commitment.

As a result, the company’s 50/50 partnership with Orix Corporation to develop a $10b integrated casino resort at Osaka is the only project moving ahead. Last week, the company announced that preliminary work had begun on the site. Best estimates are that the property could open by 2030. Long-range catalysts mostly don’t work for casino stocks as they do with the trees growing to the skies madness we see in new tech stock startups.

Yet in this case, from now on we can expect to see a growing news flow from Japan as the project takes hold which will be positive for the stock downstream. The key: it is now certain that MGM’s project will not only be first mover in Japan, but in all likelihood will have at least a 3 to 4-year head start moat before any viable competitor appears. The demos of Japan, despite the trail of opposition we have seen, are pure gold.

This is a population of an estimated 7.2m regular pachinko players in a nation that ranks 3rd in per capita GDP and an established presence in gaming venues all over Asia. Our estimate based on a mix of relative population/average income and gaming proclivity with Singapore brings us to a projected $5b to $6b for the MGM Japan project.

Conclusion

Our bullish outlook on MGM Resorts International arises from our conviction that as a global leader with a footprint established in every key gaming zone in the world, coupled with its aggressive leadership in sports betting volume among casino operators, makes MGM stock a solid buy.

That the stock continues to trade, as does most of the casino sector, at unfathomable discounts to value and prospects post COVID, provides an entry point at ~$40, which we see as remarkable cheap. The company’s finances are sound, its businesses on the rise, its global vision and execution should be what investors want to see in their stocks. MGM Resorts International stock is a solid buy.