MGM Resorts International (MGM) has gained almost 60% since the start of the year, after adding another 1.74% on Monday, September 9th. The gaming industry was lifted Monday by news of a new casino project in Macau by SJM Holdings Ltd. and news over the weekend of Tokyo winning its bid to host the 2020 Olympics, increasing speculation that Japan may legalize casinos. Furthermore, MGM benefited from beating earnings estimates of one cent per share when it announced second quarter earnings of four cents per share on August 6th.
At the same time, MGM China also announced a dividend of $113 million, $57 million of which is payable to MGM Resorts International. However one of the most important trends for the company was the 2.5% increase in Las Vegas strip REVPAR, driven by gains in both occupancy and ADR in the quarter. MGM also cited strong 2014 booking trends, which will be highlighted by the return of the CONEXPO-CON/AGG show in March of 2014; an event held in the city every three years that brings over 150,000 attendees.
Looking forward, MGM has other drivers in their home city of Las Vegas. In spring 2014 the company will launch the Delano Las Vegas which will be created from The Hotel at Mandalay Bay, with renovations expected to start before the end of the year. This is on top of the recently opened Light night club and the launch of the Michael Jackson ONE show. These improvements should help grow revenue at MGM's third most important property in Las Vegas. For example the more recently renovated Bellagio has seen revenue growth of over 4% since the start of the year, compared to just 2% at Mandalay Bay.
Revenue at New York-New York and Monte Carlo could also see modest bumps next year as the company invests in upgrades to those properties. These upgrades will include Las Vegas's first Shake Shack, a popular New York burger stand, and a Hershey's Chocolate World. This will be a precursor to the arena MGM is developing behind these properties. These upgrades will be important as Caesars Entertainment Corporation (CZR) brings its project, The Linq, online starting at the end of this year.
More immediately, MGM will benefit in the current quarter from the Mayweather-Canelo Alvarez fight at the MGM Grand and the I Heart Music Festival also at the MGM Grand at the end of September. The company is holding an outdoor concert across from the Luxor to go along with this event for the first time. Also, while gaming revenue on the Las Vegas strip was down 14.4% year-over-year in the month of July, it is more likely to impact Las Vegas Sands Corp. (LVS) and Wynn Resorts Ltd. (WYNN) than MGM and Caesars. This is because the decline in gaming revenue was driven by a fall in the win percentage (luck factor) for baccarat on the strip and that game has been fueling the revenue growth at Sands and Wynn. MGM and Caesars are comparatively less dependent on baccarat.
When you look at MGM Resorts, it appears to be moderately undervalued compared to its peers. For example, its revenue growth rate is ahead of both Wynn and Caesars, yet MGM has the lowest EV/EBITDA ratio in this group. While Melco Crown Entertainment Ltd. (MPEL) has the highest growth rate with revenue expected to increase 9.8% next year, it also has the highest EV/EBITDA ratio at 16.4, almost 50% higher than MGM's 11.15. You can also see where analysts are becoming more optimistic on the stock, raising their estimates of MGM's earnings for the next year far more than any other company.
Looking at the chart you can see MGM's strong performance since the end of last year, a trend that has accelerated throughout the summer. While I am bullish on the stock, I believe better pricing will be available to investors soon. The first place I would look to buy is around the 20 day moving average a dollar lower than where the stock is today. If the stock pulls back below the 20 DMA I would look for it to find support around $16 to $16.50 per share. With that said, the stock is trading at its highest levels since 2008 and there is little upside resistance to slow its rise.
One possible play on MGM is to buy November $18 strike calls for $1.62; this would make money if MGM is able to capitalize on large events in the current quarter as well as benefit from the trend in strip gaming revenue. The stock would need to be above $19.62 at expatriation to make money with this trade.
Data sourced from: Company filings, and Yahoo!Finance. Chart from: Freestockcharts.com