MGM Resorts International - The Real Story

Jun.15.12 | About: MGM Resorts (MGM)

In the face of the economic downturn and the huge challenge of carrying its debt financing, MGM Resorts International has managed to build its gigantic CityCenter, to include its new hotels, Vdara and Aria. If the company can continue to expand its revenues and make its payments for the next few years, I believe this stock could be a potential double or maybe even a potential triple. However, if down the road, it should not be able to carry its debt, then all bets would be off. I prefer to remain optimistic, but that's my opinion.

Assuming that the company's total assets reach my estimate (denoted by an "E" following an estimated figure) of about $37000E in 2013, and projecting out my estimate of sales/assets ratio for 2013 of about 29%E, total revenues should achieve my estimate of $10400E in 2013. If you apply its recent stock price/sales ratio of about 0.66X to projected total revenues, you could get a stock price target of about $14 per share.

A target price of $14 would be within its 52-week range of about $7.40-$16.05, and just above its 200-day moving average, presently at about $12.35. In looking at the 200-day moving average trend, the stock price could be finding a base, in my view; however, with its relatively high beta, estimated by Yahoo Finance at about 2.49, this stock has been relatively volatile in the past with respect to major market moves.

Now, it's time to grab a beer and take off your shoes, because I'm going to attempt to talk about the real story here. No guarantees, whatsoever. First, MGM Resorts International is a Las Vegas-headquartered company, plain and simple, despite the fact that the holding corporation is chartered in Delaware. So, there's no way to take the game side out of the company, because gaming is a major part of their business. Its business mix is gaming, hospitality, alcohol and food, and everything consistent with a major vacation resort hotel.

MGM Resort International's biggest hurdle is its annual interest expense in the ballpark of roughly $1.1E Billion. By the time the cost of generating revenues, general cash expenses and interest expense have been taken out, the company, in my opinion, has been hard pressed at times, since the economic downturn, to show a cash profit. If total revenues ever do reach my 2013 estimate of $10.4E Billion, I would hope that MGM Resort International's ability to deal with its cost of debt financing would be substantially mitigated. From this perspective, I could believe a net cash flow number, after capital spending and interest expense, to meet or even exceed the $1.0E Billion mark, perhaps in 2014 or later.

I've made some best guess estimates of future earnings per share (NYSEARCA:EPS) and revenues. Please keep in mind that all dollar amounts ($) are in millions, except per-share data, and the company's fiscal year ends December 31.

EPS Estimates:

Revenue Estimates:

  • $9200E for 2012
  • $10400E for 2013
  • MGM Resorts International reported revenues of $7849 for 2011.

Making my best guess, I have assumed that the company's cost of equity capital would be my estimate of 21.92%E; based on the Capital Asset Pricing Model, a beta of 2.49, my guess of the risk premium on the stock market (as represented by the Standard and Poor's 500 Index) of 8.0%E, and a risk-free interest rate of 2.0%E.

Using discounted cash flow analysis, I have come up with the following estimates: A target price of $31.06E = [$1000E/(21.92%E-15.34E%)]/488.92; where $1000E represents estimated cash flow; and, 15.34%E is my guess as to a growth rate, based on recent changes in total assets; and, finally, 488.92 million is my snapshot estimate of the number of outstanding common shares.

Based on my estimates and assumptions made above, I could view this stock as a potential double or even possibly a potential triple in the next few years. The downside could be an inability by the company to meet its debt obligations, which would void my estimates and assumptions.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Disclaimer: The author does not own or beneficially own any investment securities or have a financial interest in MGM Resorts International, and was not compensated. Although some information I may believe to be true, I make no representation as to any of its truthfulness, correctness or accuracy, and this report contains opinion and speculation. Nothing in this report is to be construed as investment advice, and nothing in this report is a recommendation or solicitation. Read the full disclaimer here.