As emerging markets adopt consumerist cultures, secular trends in casinos look stronger with each passing month. In this article, I will run you through a DCF model on MGM Resorts (MGM) and then triangulate the result with an exit multiple calculation and a review of the fundamentals compared with Las Vegas Sands (LVS) and Wynn Resorts (WYNN). I find that LVS and Wynn are preferable to MGM right now.
First, let's begin with an assumption about the top line. MGM finished FY2011 with $7.8B in revenue, which represented a 30% gain off of the preceding year. I model per annum growth being around 13% over the next half decade or so.
Moving onto the cost-side of the equation, there are several items to consider: operating expenses, capital expenditures and taxes. I expect cost of goods trending around 61% of revenue versus 19% for SG&A, and 4% for capex. Taxes are estimated at 35% of adjusted EBIT (ie. excluding non-cash depreciation charges to keep this a pure operating model.)
We then need to subtract out net increases in working capital. I anticipate this figure hovering around 3% of revenue over the explicitly projected time period.
Taking a perpetual growth rate of 2.5% and discounting backwards by a 9.5% yields a fair value figure of $14.88, implying just 6.9% upside.
All of this falls within the context of strong performance:
2011 was a rewarding year for MGM. Our net revenues and EBITDA were both up double digits and our margins were up over 100 basis points. MGM China and CityCenter had breakout years, both had significant growth and EBITDA year-over-year and we ended the year on a high note with fourth quarter RevPAR up 13% year-over-year. As a matter of fact, we beat our RevPAR guidance every quarter last year and that was driven by better than expected FIT and leisure bookings. EBITDA for the wholly owned MGM China and CityCenter enterprises were all up double digits in the fourth quarter.
MGM is currently bleeding cash and is expected to lose $0.45 per share in 2012. Profitability is expected to occur at the close of 2014. At this point, however, I expect outperformance from LVS and Wynn. LVS trades at a respective 39x and 19.6x past and forward earnings versus 25.7x and 18.6x for Wynn.
Consensus estimates for LVS' EPS forecast that it will grow by 27.7% to $2.58 in 2012 and then by 20.5% and 18.3% in the following two years. Assuming a multiple of 21x and a conservative 2014 EPS of $3.63, the stock would hit $76.23, implying 25.5% upside. LVS is led by top management that has recently strengthened its confidence to returning free cash flow to shareholders.
Consensus estimates for Wynn's EPS forecast that it will grow by 5.7% to $5.90 in 2012 and then by 15.8% and 14.1% in the following two years. Assuming a multiple of 21x and a conservative 2013 EPS of $7.69, the stock would appreciate by 28.7% upside. Even still, based on data sourced from NASDAQ, LVS is preferred by analysts.