Following the recent Macau newsflow (crackdown on illegal money transfers, potential reduction of the maximum duration of visitor visas to Macau from mainland China), MGM (NYSE:MGM) has been the most oversold casino stock, down 7% from its early May high vs. Wynn (NASDAQ:WYNN) down 6% and LVS (NYSE:LVS) down 5%. We believe this is not justified as MGM is much less exposed to Macau and is more a play on Vegas when the recovery is gaining steam.
Q1 earnings upside driven by lodging in Vegas
We have been saying for a while that even if Macau (50-60% of casinos revenues on average) was likely to keep defying gravity (despite the above-mentioned "noise"), Las Vegas was becoming a key upside driver as the city was still at an early stage of its recovery and as expectations were still low. MGM, which has a high 70% U.S. exposure, perfectly illustrated this with blowout Q1 EPS of $0.21 vs. consensus of $0.09 while LVS and Wynn beat expectations by a "mere" 8% on average.
The lodging part of the business in Vegas was healthy, with MGM and Wynn reporting RevPAR growth of 14% and 6% respectively, ahead of expectations. This was driven by a particularly strong convention calendar, leading MGM to guide more conservatively for Q2 (RevPAR growth expected around +5%).
In view of strong group bookings for the remainder of the year and of Wynn's bullish stance on Vegas for the first time in a while (expects Q2 RevPAR up 6-7%), we believe that MGM is managing expectations and that RevPAR growth is likely to remain impressive in Vegas, suggesting that the oversupply issues are now well behind us.
The gaming upside should materialize soon
If lodging was strong in Q1, gaming revenues were still disappointing: -2% at MGM and below expectations (+3%), partly driven by lower hold.
We believe this is just a question of time before gaming revenues fully recover in the city, as a better economic climate in the U.S. and increasing occupancy in hotel rooms are likely to spark increased gaming activity.
Even if gaming revenues have been mixed in Vegas year-to-date (after a two-month slide, they recovered 10.9% in March), slot machine wagering figures have increased for three consecutive months. This suggests that visitors are spending more on gaming and this could be the leading indicator of a sustained recovery.
Vegas exposure and financial leverage make MGM a top pick
In all, the upside potential remains significant in Vegas in view of the expected gaming recovery and of key lodging metrics still well below the 2007 peak (average rates 10% below, occupancy 400-500bps below).
This should spark a strong operating leverage at MGM. Against this backdrop, the stock's huge financial leverage (net debt / equity around 400%) is likely to boost its EPS growth and valuation.