For five years now in the casino sector, stocks with significant exposure to the international and especially the Macau Chinese market have outperformed domestic companies with more exposure to the Las Vegas Strip. Companies such as Las Vegas Sands (LVS) and Wynn Resorts (WYNN) have been the leaders in the sector. Regional casinos companies such as Penn National Gaming (PENN), Pinnacle entertainment (PNK) and Ameristar Casinos have outperformed companies with more significant exposure to Las Vegas Strip and locals market such as Boyd Gaming and MGM Resorts (MGM). However I think an inflection point was recently reached and that trend has now reversed itself. The time has arrived when the Las Vegas centered companies have been and will continue to significantly outperform these other companies in the sector with more international exposure for some time to come.
As signs of a recovery become clearer in the Las Vegas casino market stocks with direct exposure like MGM resorts (MGM) and Boyd Gaming (BYD) have surged in the last few months. Up until recently Boyd Gaming was my favorite in the sector and I still think it has a potential 33% potential upside in the next twelve to eighteen months. However MGM Resorts is now the best bet and the most direct leveraged company with significantly more exposure to the Las Vegas Strip market. I estimate the stock could still offer 30% plus potential gains so it is now my favorite stock in the sector. MGM Resorts is the casino conglomerate that was formed by the merger of MGM Grand, Mirage Resorts and Mandalay Resorts. That is in addition to a 50% ownership in the enormous City Center Las Vegas property, a 50% interest in the Borgata in New Jersey (that it had to relinquish but will probably be allowed to reacquire) and a very valuable 51% interest in MGM China. MGM basically owns over half of the rooms on the Las Vegas strip. This gives the company over 42,000 hotel rooms on the Las Vegas Strip and some valuable regional properties such as MGM Detroit and Beau Rivage.
The assets the company has an incredible collection of nineteen gaming properties designed to cater to the extreme international high roller, mid-tier and even low end play. There are a couple of huge problems that have dogged the company for almost five years now and have kept the stock price low and a significant under performer. The company after all its acquisitions and the horribly timed construction of City Center is burdened with $13.75 billion in debt which is equal to 176% of current equity. However the two things that have hurt the company for the last five years; its dependence on the Las Vegas Strip market and its City Center property that has been unprofitable form the beginning have begun to turn now. The metrics on the strip have seen recently increased gaming revenue, average occupancy rates and daily room rates. City Center finally showed a profit recently and that was an important milestone for the company. MGM was expected to report a ten cent per share loss and surprised the street with a one cent profit in its most recent earnings report. That has caused the stock to surge from $12.50 to $15.80 in the last few months. However I think over the next twelve months the stock could continue higher to about $21 per share which equals another 32% gain.
Here are the potential catalysts that should continue to drive the stock higher over the next twelve to eighteen months:
1. It was awarded a new casino in Springfield, Mass and have the potential to be granted a license to build a new property near National Harbor Maryland which would put casinos nearest Boston and Washington D.C. which. That in addition to another new Macau property on the Cotai strip gives it growth over the next three years, which has been absent for five years now.
2. If the Las Vegas market continues to improve, its leverage to the strip and highly leveraged balance sheet might start to work much less against it as improved profitability will allow it to refinance debt at lower rates.
3. It had to relinquish a 50% ownership interest in the Borgata with Boyd Gaming due to a licensing issue. Luckily it didn't sell and now have a chance to either gain back control or sell after the passage of internet gambling statewide in New Jersey. This added value back to an asset that was in declined because of the declining Atlantic City gaming market.
4. Because of its dominance in the casino sector with brands like Bellagio and the MGM brand, any national or additional state legalization of online gaming could benefit the company.
5. MGM China is now grossing almost $3 billion, so I value its 51% interest in that asset alone at $5 billion, which is 26% of the entire enterprise value of the company. That does not include any value of its second larger Macau project that has just begun construction. This 51% interest should provide at least $500 in dividends per year to MGM which helps cover its huge interest expense.
Right now after just returning to profitability and a stock price of $15.80, MGM trades at an enterprise value of $19.77 billion or 2.23 times estimated 2013 revenue of $8.85 billion. I think it will be easy for MGM's valuation to achieve a level of 2.5 time's annual revenue which equals $22.13 billion enterprise value. Because the company in highly leveraged, that would equal a share price almost $21 per share or 33% higher than the current stock price . This is achievable because casino companies used to regularly trade at three times revenue, so two and half is very achievable. My point is while this stock has already moved up significantly; MGM still has the potential to go up an additional 33% in the next twelve to eighteen months.