MGM (NYSE:MGM) delivered a strong set of Q2 figures with revenues up +4% and EBITDA up +8%, both figures coming in slightly ahead of expectations. Vegas and domestic operations were the star performers with revenues and EBITDA up 6% and 26%, respectively, as both the casino and room segments performed strongly (RevPAR up 6% vs. guidance at +5% year-on-year). In the same time, Macau recorded a dramatic slowdown, with revenues dropping 1% and EBITDA rising only 3% as Q2 VIP volumes were down 10%.
We have been saying since the beginning of the year and our article, "Macau Continues To Impress, But Vegas Likely To Offer More Upside," that Vegas offered much more upside than Macau (50-60% of U.S. casinos operators revenues on average) as the city was still at an early stage of its recovery and as expectations were still low. Specifically, we have been bullish on MGM which has the highest revenue exposure to the U.S. casino market (63% in Q2 vs. Macau at 32%). We stick to our view on MGM considering that the Vegas upside is just starting to materialize and that Vegas is more and more likely to stand out vs. Macau. The lodging part of the business on the Strip has been recovering for several quarters driven by a particularly strong convention calendar but had failed until now to spark some upside on gaming revenues. It looks like gaming upside is finally coming and Macau's recent woes could clearly help by shifting some VIP business to Vegas. Indeed, the recent news flow in the Asian city (crackdown on illegal money transfers, potential reduction of the maximum duration of visitor visas to Macau from mainland China…) has not been supportive and it is highly likely that austerity and anti-corruption measures in mainland China are here to stay. This could lead some Asian VIPs to fly to the Strip.
In all, we remain highly confident in MGM's outlook as accelerating revenues in Vegas should spark a strong operating leverage. In addition, the stock's financial leverage (gearing around 400%) is likely to boost its EPS growth and valuation. For those who are concerned about poor Macau trends (Macau clearly drives sentiment on the sector), an attractive strategy could be to go Long MGM / Short LVS (NYSE:LVS) or Wynn (NASDAQ:WYNN).
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