MGM Resorts International (MGM) is one of the largest hotel and casino operators in the world. With billions in revenue and properties like Mandalay Bay, New York-New York, Bellagio, The City Center in Las Vegas and others, it is a proxy for the health of the consumer economy in the United States. When the economy is good and people have jobs, consumers travel, stay in hotels, gamble, eat and drink in Las Vegas.
Earlier this year, the markets were rising on optimism that the U.S. economy was recovering, at least slowly but surely. That thesis has been called into question in the past couple of months as a slowdown in China, a recession in many European countries due to the ongoing debt crisis, and now signs of weakness in the U.S. all combined to send stocks lower. MGM shares have been dropping and while the stock might look like a "value" when compared with where it traded several weeks ago, there are several reasons why it's probably too early to buy the stock. In fact, it's hard to see any bottom in sight for the stock now. Here are a few reasons why MGM shares could be heading lower:
1. Recent data shows that the United States could be heading for a recession. Jobs data has been disappointing for the past 3 months, and according to one index, manufacturing in the U.S. has dropped to the lowest levels in the past couple of years. A recession gets even more likely as we head toward the end of 2012, when the "Fiscal Cliff" issues come into focus. This term relates to the automatic government budget cuts and higher taxes could further dampen any hopes for growth. In a gloomy environment, consumers are less likely to travel and when they do, they will probably spend less. Businesses are also less inclined to spend as much for tradeshows and other conferences, which are key to the Las Vegas economy and MGM.
2. MGM carries a substantial amount of debt, which could become a real burden for the company and for shareholders, if the economy double-dips into a recession. Its balance sheet has about $1.77 billion in cash and $13.36 billion in debt. In the last financial crisis, companies that carried high debt loads saw much larger than average drops in the share price and cash-rich companies often outperformed as investors sought strong balance sheets as a safe-haven. In addition, shorts tend to focus on debt-ridden companies because they view companies with relatively low cash-to-debt levels as easy targets.
3. Some of MGM's hotels in Las Vegas are offering discounts and special packages. Rates at Mandalay Bay are now being offered for as low as $74 per night. Other packages involve low rates and special deals for drinks, food and other amenities at the hotel. This could be a sign that demand for the all-important Summer season is weak, and that could spell trouble for financial results in the coming quarters.
4. Wynn Resorts (WYNN), is another leading casino and hotel company, which recently reported weaker-than-expected financial results. Wynn earned $1.38 per share in the second quarter, which was below expectations of $1.50 per share. Revenue was also weak for Q2, at just $1.25 billion, while analysts had expected about $1.33 billion. These results could be a harbinger of what might be disappointing results for MGM when it reports earnings on August 7, 2012.
MGM shares have broken the key psychological support level of $10, and there is no clear bottom in sight now. The 52-week low is $7.40 per share, and it is not certain if the stock will hold that level if the economy continues to deteriorate. It might make sense to avoid the stock for now and consider it at the end of 2012, when more insight into the economic trends, and the fiscal cliff issues might be available.
Key Data Points For From Yahoo Finance:
Current price: $9.40
52-Week Range: $7.40 to $16.05
2012 Earnings Estimate: a loss of 50 cents per share
2013 Earnings Estimate: a loss of 25 cents per share
P/E Ratio: n/a due to ongoing losses
Data sourced from Yahoo Finance. No guarantees or representations are made.
Disclaimer: Please consult a financial advisor before making investments.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.