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MGM Resorts May Have A Near-Term Geographical Advantage

Jun. 10, 2020 1:37 AM ETMGM Resorts International (MGM)LVS, WYNN17 Comments
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Investing Hobo


  • MGM's high US exposure could prove to be a relative advantage as the US reopens to a sizeable and more eager customer base.
  • The company's low exposure to Macau and Chinese tourism could limit downside risk in the short term due to Chinese consumer caution over COVID-19.
  • MGM could also be less impacted by increased US/China tension and a potential economic decoupling due to its relatively lower Macau exposure compared to its major peers.
  • Although MGM was initially unjustly sold off, its recent stock recovery may have fully played out.
  • Ongoing COVID-19 concerns should temper investor willingness to overpay for MGM above historical mean multiples.

vegas reopening

(Image from Daily Mail showing reopening enthusiasm and a lack of social distancing.)

During the past year, the US stock market have confounded many experts. Wild swings in both directions so far in 2020 have been no exception. MGM Resorts International's (NYSE:MGM) stock plunge of over 80% during a one-month period between mid-February and mid-March was perhaps the most surprising among its peer group. When the COVID-19 pandemic swept throughout Asia, Macau-linked casino stocks rightfully corrected. However, among the three largest casino companies listed in the US, MGM took the largest hit despite having the least exposure to Macau. Although MGM's spectacular stock price recovery was largely justified after an irrational panic sell-off, the risk/reward profile still remains slightly bearish as long as COVID-19 cases continue to raise worldwide.

First-Quarter 2020 Outperformance

In fiscal 2019, MGM generated just 22% of its adjusted property EBITDA in Macau, which was far less than that of its main peers. Since COVID-19 originated in China, Macau was initially hardest hit and was among the first regions to shutter casino operations last February. Although US operations were ultimately halted in mid-March, MGM's lower exposure in Asia should have insulated its first-quarter results compared to Wynn Resorts (WYNN) and Las Vegas Sands (LVS).

FY 2019 Total Adjusted Property EBITDA Macau Adjusted Property EBITDA Macau Exposure
MGM $3,347.72 $734.73 21.95%
LVS $5,389.00 $3,189.00 59.18%
WYNN $1,815.41 $1,378.37 75.93%

(Data compiled from fourth-quarter 2019 earnings from MGM, LVS, and WYNN. Dollar figures in millions.)

Yet, despite MGM's first-quarter regional advantages, its stock declined by the most during a one-month period prior to the bottom set on March 18. In fact, MGM shares almost retraced back to 2009 post Financial Crisis levels. In contrast, LVS and WYNN only retested the industry's previous cyclical lows set back in late 2015.

This article was written by

Investing Hobo profile picture
I am generally a long term investor looking for macrotrends which I believe may play out over the course of several years. While I look at a lot of varying criteria in researching potential investments, I'm more aligned with the analytics involved with investing. Although it's not always a sureguard in shorter time frames, I believe over the longer course of time, valuations and earnings power always determine the path stocks trade. As such, I am value driven and look more at companies trading at discounts to growth rate and earnings power, especially if it's currently being discounted by the market. While I track many different industries, I'm currently have a China centric focus believing the long term macro trend of its population entering the middle class is in its early cycle. As China's gdp per capita increases, discretionary buying power among its middle class should increase at a higher exponential rate. As a result, larger well known companies are poised to profit from this cycle. In addition, I may focus much of my writing on the solar sector for a few key reasons. First the solar sector is widely misunderstood. Second, many companies which operate within the sector are extremely transparent in operating structure. Lastly and more importantly I believe in the longer term prospects for the industry because the economics can be justified when looking at longer trend patterns.

Analyst’s Disclosure: I am/we are short WYNN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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