A Bullish Case For MGM

| About: MGM Resorts (MGM)

The Casino and Gaming Industry is one of the best performing industries in the market. During the last 6 months the S&P 500 has lost more than 12% of its value, while the Casino & Gaming industry has gained nearly 6.70%. The performance within this industry is remarkable, considering that revenue from casinos have declined with the economy. Yet, the gambling market is now expected to improve, which could mean more gains for several stocks within the industry. I believe that MGM Resorts (NYSE:MGM) presents the best long term opportunity to post large gains from its current price. Below is a look at MGM and its performance over the last few months and the reason behind my belief that it will post large gains in the future.

MGM Resorts got hammered, with a loss of more than 33% during the last 2 months. The majority of this loss was between the dates of July 26 and August 10, when the markets were selling at a rapid rate. The stock trades with a beta of 3.84 which means the stock is 284% more volatile than the market, which already trades with high volatility. A large portion of the company's loss is related to the poor outlook of the overall economy, which includes a sharp loss of revenue in Atlantic City. Investors seem to have lost their patience with MGM as revenue has dropped in each of the last 4 years along with profit margins and an increased debt to assets ratio. Therefore, one could conclude that fundamentals are poor, technicals are a disaster, and the news has been discouraging.

The company's operational issues may take years to fully correct but I believe it's moving in the right direction. The company is heavily reliant on the health of the economy to provide customers willing to spend their money on entertainment, for the chance of winning at one of MGM's hotels or casinos. Yet recent reports show that markets in Las Vegas and Macau, two of the largest markets, have improved and are expected to continue improving during the coming years. I believe the company is already showing improvements after releasing strong earnings that exceeded expectations.

The stock has gained 11.5% in the last month as the market showed signs of recovery. With such a high beta it should be expected that this stock will experience large gains or devastating losses with the markets trend. Therefore, in this economy I do not believe that MGM is best suited for the short term investor but rather for the investor that can afford to wait. I believe it's presenting a perfect opportunity with a price of $10.32 and a price to earnings of only 2.12.

I believe that $10.30 is near the bottom of its range, with the company making good business decisions and recently posting strong earnings. The company managed to increase revenue by 17% year-over-year during its most recent earnings report, as it emphasized the improvements from the Las Vegas strip. In addition, the company improved its balance sheet by acquiring more than $430 million in additional assets, lowering its debt to assets ratio under 50% for the first time since 2007. Yet MGM still has more than $12.6 billion in outstanding debt which, many believe, places the company at risk during a recession.

I believe that a small position in MGM makes a great long term investment, with the potential to return large gains. The stock has a one year target of $16.30, a gain of nearly 60% from its current price. Although I doubt the stock will exceed this target, I do believe it could come very close. The next few months could be discouraging to investors looking for short term gains. The company has a large amount of debt and trades in an industry that relies on the strength of the economy for consumer confidence. MGM is moving in the right direction, and is operating with higher revenue with many of its large markets continuing to improve. The company has growing assets, strong guidance, and improving fundamentals. Therefore I believe the stock could return exceptional gains over the next several years, for the investor that is willing to be patient as the company improves its areas of concern.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in MGM over the next 72 hours.

Additional disclosure: As with any investment, due diligence is required. The opinions in this article are not intended to be used to make a particular investment or follow a particular strategy.