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Take A Gamble On MGM

Summary

Guaranteed EBITDA improvement as LTM EBITDA does not reflect run-rate EBITDA.

Assuming zero organic growth, the lowest EBITDA projections for its new projects, and a multiple significantly below MGM’s current and historical multiple, MGM’s stock still offers significant upside.

End of three to four-year capital expenditure cycle will boost free cash flow and cash returned to shareholders.

MGM's Macau operations align with the market's growth trends.

Strong potential catalysts for future growth.

After spending roughly $5 billion on growth projects over the last several years, MGM’s new projects will lead to significant EBITDA improvement.

MGM growth investments over the last four years include:

  1. MGM Cotai – a new $3.4 billion casino in Macau that was completed in February 2018
  2. MGM Springfield – a $960 million project to open a new casino in Springfield, Massachusetts which was completed in August 2018
  3. Monte Carlo - $550 million renovation of its Monte Carlo casino in Las Vegas

From the effect of these new openings, run-rate EBITDA is almost guaranteed to be significantly higher than LTM EBITDA. Assuming zero organic growth, EBITDA projections on the low-end of management guidance and analyst estimates, ($400 million for MGM Cotai, $100 million for MGM Springfield, and an $80 million pre-renovation estimate for Monte Carlo) and an EBITDA multiple of only 11x, leads to a projected share price of $37. The selected 11x EBITDA is well-below MGM’s current multiple of 13.29x and its historical average.

As MGM finishes its final growth project, management plans to return significant cash flow to investors. MGM has outlined a plan to return $2.3-3.3 billion to shareholders through dividends and share buybacks. This $2.3-3.3 projected cash flow to shareholders over the next couple years is 15-23% of MGM’s current market cap.

Additionally, gaming companies have been hit hard over the last years, as investors are not buying into the resurgence of the Macau market. After rapid growth in Macaau that peaked at annual revenues of $44-45 billion in 2013 and 2014, gaming revenues significantly dropped in 2015 and 2016, as the industry posted annual revenues of $28 billion each year. This precipitous decline has left investors skeptical of Macau’s resurgence, but Macau has returned to growth, and as of August 2018, Macau gaming revenue has posted 25 consecutive months of growth. Investors remain skeptical of Macau, but MGM is poised for success in this market.

Macau is shifting away from VIP gambling to a more “Vegas” approach centered on entertainment and tourism. This shift aligns well with MGM’s new MGM Cotai casino that opened in February 2018. MGM Cotai is mass-market, entertainment focused casino that is well-positioned to capitalize on the changing Macau environment. MGM Cotai will offer more diversified revenue streams than most other gaming centers in Macau, which will provide stability in a volatile market.

MGM also has significant outside growth opportunities. Due to the difficultly of the projecting the regulatory environment, I am not highlighting these as an investment catalyst, but each have the potential to drive value. Even in the absence of these factors, MGM still offers value for investors.

  1. Japan, which has legalized casino gambling, is likely to become the second largest gaming market behind Macau, and MGM and Las Vegas Sands Resorts are the top prospects to garner a license based on a variety of factors, such as understanding of the Japanese culture and partnership experience
  2. U.S. repeal of the prohibition on sports gambling. MGM has entered into partnerships with the MLB and NBA to aid MGM’s live betting platform. MGM has also partnered with select NFL teams. MGM seems well-positioned to capitalize on growth within the sports gambling sector and appears to be emerging as the market leader in the sector, but is important to note that following the U.S. repeal, individual states still must legalize sports gambling.

Conclusion

Investors should consider MGM Resorts International as a potential long opportunity. Quantitatively, even with conservative projections and multiple assumptions, MGM is projected to trade at $37 per share.

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