MGM Resorts International (MGM) is a hospitality company. Its primary business is the ownership and operation of casino resorts, which includes offering gaming, hotel, convention, dining, entertainment, retail and other resort amenities. The Company has two segments based on operating regions; wholly owned domestic resorts and MGM China. MGM is the heart of Las Vegas the company operates 30% of all rooms on the Strip. MGM is behind some of the biggest names in Las Vegas including Bellagio, CityCenter, The Mirage, Luxor, Mandalay Bay, Excalibur and MGM Grand. The company's main competitors in the industry are Las Vegas Sands (LVS), Wynn Resorts (WYNN), Caesars Entertainment Corp (CZR), and Boyd Gaming Corp (BYD).
Las Vegas has slowly been coming back since the financial collapse. Anyone who says that Las Vegas has seen its best days is living in a dream world. Sin City is a concept deeply ingrained in the American culture and the number of visitors to the strip is the highest it has ever been and is continuing to set records, though revenue per guest has significantly declined.
MGM's current market cap is $5.78 billion and trades at around $11.5 per share a far cry from its 2008 valuation when it traded around $90 dollars a share and had nearly half the amount of shares outstanding. Currently the company has on hand 900 million in excess cash and 855 under the revolver loan totaling over 1.75 billion in liquidity. Long term debt is at 13 billion and while that may seem high, high levels of debt are normal within the industry, which in many ways works like a REIT. In fact MGM's problem is not the high level of debt, but its high interest expense on that debt. The company is paying 11%-13% interest on fairly large portions of its debt, debt which they were forced to take to starve off bankruptcy during the economic collapse. MGM is currently in the process of transforming its debt portfolio, just recently they completed landmark refinancing transactions.
- Entered into a $4.0 billion amended and restated credit facility, comprised of a $1.2 billion revolving facility, a $1.05 billion term loan A facility and a $1.75 billion term loan B facility.
- Issued $1.25 billion of 6.625% senior unsecured notes due 2021.
- Accepted all of its outstanding senior secured notes that were tendered in its previously announced tender offers by the early consent date and delivered a notice of redemption for any remaining outstanding senior secured notes in connection with satisfying and discharging these notes.
MGM has refinanced a third of its debt resulting in 150 million in interest savings next year. These interest savings will directly improve the bottom line. With total interest expenses at around 250 million per quarter management believes additional debt restructuring will save the company $200 million per year going forward.
If MGM can lower their interest expense by another 150 million in 2013 they could generate $500 to 650 million dollars in cash after capital expenditures. Cash that could go a long way towards further improving debt structure and funding different expansion initiatives.
Capital expenditure is expected to be around 430 million dollars in 2013; on the other hand depreciation is expected to be just shy of $1 billion. This disconnect is caused by the enormous expansion MGM saw before the economic crisis while working on huge projects such as city center and remodeling many of the hotels and casinos. What does this mean? It means that GAAP measures of profits are grossly understating the true earnings power of MGM.
The current interest rate environment is perfect for MGM's highly leveraged business model. If over the next two years MGM is able to lock in debt at considerably lower interest rates, operating performance will improve for decades to come.
Macau specifically the Cotai development offers the largest growth opportunity. The Cotai development is a solid long term investment in a burgeoning environment. While this is a long term project that may take four to five years I believe it is well worth it.
MGM is a difficult company to value because of the highly leveraged debt structure as well as the parity between depreciation and CapEx. When compared to Las Vegas Sands or Wynn Resorts, it is clear how large the debt burden has been on the company and how hard hit the Vegas strip has been. MGM does not deserve a valuation of half that, despite having revenues that are over 30% higher. This year will be a turnaround year for MGM, their debt burden will be greatly reduced and margins will improve due to increased income per visitor. This effect will be compounded because of MGM's high leveraged structure. Furthermore, a few years down the line, once the Cotai development is complete, the line MGM China, which is extremely profitable will start paying dividends to the parent company. With these improvements, MGM's stock could easily reach $20-25 per share in the coming year and substantially higher if the Cotai development performs as expected.