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MGM Resorts International (NYSE:MGM) has sold MGM Growth Properties LLC (NYSE:MGP), the company collecting rent on MGM’s buildings, to VICI Properties Inc (NYSE:VICI). Through this sale, the company has solidified $11.6 billion (i.e., liquidity for its domestic operations). MGM began expanding its portfolio, leaving it with more properties than ever before — increasing at a compound annual growth rate of 1.84% since 2012. With the gross profit increasing about 8.44% in any given year, excluding 2020, we can observe that the property acquisitions are a safe bet for the company’s continued growth. MGM has already acquired the Cosmopolitan for $1.625 billion and the remaining 50% share of CityCenter for $2.125 billion. In the case of the planned Casino in Osaka, it is essential to note that Japan has only 26 casinos operating with licenses. Additionally, MGM’s planned resort will be the region’s first casino. As MGM continues expanding its property portfolio, it will acquire more sources of revenue, ultimately enlarging its value.
MGM’s management has stated its mission to “be an industry leader in iGaming.” In 2018, MGM launched BetMGM — a 50/50 venture for online betting applications. BetMGM is currently available in 16 states and the District of Columbia. As more consumers are now staying indoors, this emphasis on online gaming is essential for the casino segment. MGM’s iGaming focus is necessary and will account for a more significant portion of the company’s revenues. This will be achieved as states’ legalization of sports betting continues.
MGM’s plans for expansion, both physically and virtually, will generate an increase in free cash flow that will ultimately benefit shareholders. I believe there is potential upside for the company as it is in a more solid position for expansion other players in the field.
MGM controls close to 50% of the total room capacity in the Las Vegas strip. Some prominent locations include the Bellagio, Park MGM, and MGM Macau. The casino and non-casino segments divide the revenue for the business. The former encompasses over 50% of the income produced in any given year. The revenue generated is relatively uniformly distributed across months. Table games account for 53% of the segment and are the most rapidly growing, averaging close to 12% return any given year. Slot games make up 43% and increase around 11.88% per year. The remaining categories could be classified as other and account for 4%, staying fairly stagnant in revenue. The latter of the business’ revenue is divided between rooms (making up 41%), Food & Beverage (encompassing 35%), and Entertainment and Retail (the remaining 24%). Visitor rates have increased with the economy reopening, making the rooms segment proliferate. Food & Beverage has historically been the highest growth area although not short-term wise, while the Entertainment segment always gets close attention in order to attract consumers.
The company had a recent management change with the CEO, James Murren, stepping down. The former Chief Marketing Officer William Hornbuckle rose to the challenge in March 2020 and took on the CEO role. He also served as President and COO for various MGM resorts and led efforts to redevelop properties held by the entity. Paul Salem was appointed to the board of directors in March of 2020, holding over 27 years of experience as a Senior Managing Director at the PE firm Providence Equity. The new CFO, Jonathan S. Halkyard, was appointed in June 2021 and led various M&A charges for casino-related industries such as World Series Poker and Horseshoe Gaming. With the management holding over 50 years of collective M&A and redevelopment experience, it is safe to assume that the company will continue acquiring properties as it did in 2021 with its excess liquidity.
MGM Resorts International has already announced its expansion into Ohio and Puerto Rico. While still being unprofitable, it has increased its market share from 24% to over 30% in the states it operates in. According to its earnings call, the company has already announced it expects to make over $1 billion in revenue this year. While initially, most of its consumers of online gambling originated from M life rewards — the customer loyalty program — that number has already reached 31%. This indicates just how many more people are joining the MGM ecosystem. With the younger generation being more interested in online betting, BetMGM can play a more active role in their lives as they have easier access to phones relative to the company’s physical properties. While the average age of consumers in physical and online locations is the same, around 50 to 59 years of age, the percentage of consumers younger than 50 playing is higher for iGaming— about 81.3% to 70.1%, respectively. With the younger generations shifting to the online industry, MGM holds the potential to gain revenue with stabilizing expenses. BetMGM is the most significant contributor to the number of customers in the loyalty program, now sitting at 36 million.
Drivers and Catalysts
The population growth in the Nevada and Macau region is the largest in their respective countries, providing opportunities for an increased supply of consumers for the industry. Corporate profits across the areas MGM operates in hold an R-squared of 33% for predicting Las Vegas Convention Attendance variation. Additionally, household wealth is a crucial driver accounting for 71% of the variation in the number of hotel rooms occupied nine months after the recorded household wealth.
MGM is currently conflicted by various catalysts. Because of the Omicron variant, the following quarter reports will play a significant role in analyzing the company’s revenue stream. Las Vegas visitations will play a critical part in the short term. On a surprisingly positive note, Covid-19 has left various US states requiring more money to fuel their economy. This led 13 states (including Florida) to legalize sports betting, with others following suit. Whether this leads to legalizing the whole nation’s sports betting industry is yet to be seen. This action could be just what MGM needs as consumers continue staying indoors. While the outbreak of the Omicron variant will most certainly harm the physical properties, it could be the tipping point for the remaining states to legalize the online casino industry.
The Covid-19 pandemic continues to hold strong adverse effects around the world. MGM’s finances have and most likely will continue to suffer because of the pandemic. While the company sold the land under their properties, they have gained a substantial short-term supply of cash at the potential expense of the long-term. If their investments do not materialize, the company may be left in a worse position than before the pandemic. With an S&P Global rating of B+ and a total debt to equity ratio of 1.87– it is not difficult to visualize a scenario in which MGM could require restructuring if they fail to return to pre-pandemic levels soon.
Additionally, with the recent announcement by the Chinese government to extend the current casino licenses for 13 more years, the revenue stream from Macau has become a more stable source to count on. The removal of American casinos and hospitality in the region would negatively impact Macau’s GDP, making it a safe bet that China will continue extending these licenses. Notwithstanding, the government requiring so much time to announce the renewal of the licenses gave a clear signal — that the Chinese government is unpredictable. With the hostilities between China and the United States, it could be possible that the Macau casino industry may be affected.
MGM Resorts International holds a pristine balance sheet. With over $5.5 billion in cash and cash equivalents and a current ratio of 1.96, the company will not be suffering financial obligations for the foreseeable future. The company can also be considered mature, indicating it will likely hold constant growth. On the other hand, Wynn Resorts (NASDAQ:WYNN) has a higher current ratio of 2.22 while its total cash is equivalent to 2.48 billion. Las Vegas Sands (NYSE:LVS) holds a current ratio of 2.10 while holding 1.64 billion in cash. This places MGM in a superior position for acquiring more properties, leaving it at an advantage whereby it could outbid its competitors.
As recently shown, the Chinese government is far from predictable. While it announced its program to renew licenses, the local proportion of ownership for the properties has grown from 10% to 15%. Here is where I believe MGM to be in a superior position, with only 12.72% of its revenue originating from Macau according to its 10-K report. This is a sharp difference from Wynn Resorts’ 46.76% and Las Vegas Sands’ 64.30%. Owning most of the Las Vegas Strip and having a significant portion of its revenue originating in the US, MGM Resorts International should be considered the safest option relative to its competitors.
BetMGM has also proven itself to be a favorable application, reaching a score of 4.8 out of 5.0 in the AppStore. Wynn Resorts’ app, WynnBet, only has a score of 3.8 out of 5.0. This signifies that consumers hold a more positive sentiment toward MGM’s application. DraftKings, a more established player in the online sports betting industry, also reaches a score of 4.8 in the AppStore.
Revenue decreased in 2020 by 59.98% because of the pandemic. With the revenue increase in the first quarters of 2021, MGM has demonstrated a quick rebound— recovering around 62% of pre-pandemic levels. This is an average increase of 321.17% from 2020’s quarterly reports. The Omicron variant will negatively affect revenues, but I project that by the end of 2022, the revenue will reach the same levels as 2021. This is still below pre-pandemic levels, and I am conservatively projecting that revenues will finally surpass 2019 levels by 2025.
With the pictured 6-year revenue forecast and discounting with a calculated WACC of 11.77% and a long-term growth rate of 1.75%, I project that MGM’s intrinsic value is $50.16 per share. This would result in a potential upside of 23.49% from its current price of $40.96 per share.
It is important to note that many assumptions needed to be made about the company to arrive at this number. For these reasons, I attempted to remain conservative but accept the potential of higher returns as likely. This model holds that the free cash flow projections of the firm will never surpass 2019’s free cash flow. The long-term growth rate is taken from the 10-year treasury rate, which will most definitely increase as the Federal Reserve has indicated.
Moreover, throughout my valuation, I maintain an expected gross profit margin below pre-pandemic levels — an excellent indicator to demonstrate that the company could potentially be worth more than $50.16 per share. In the bullish case, I expect capital expenditures to remain below 2019 levels because the company has already made purchases for most of its announced future properties. In addition, CapEx growth factor has decreased about 35% on average per year, disregarding 2020’s 63.39% decline. In my calculations, I expect the growth factor to equal 20% in 2023, whereby it begins decreasing 10% every following year.
Additionally, MGM’s revenue growth factor has increased by small amounts almost every year. I reflect this in my valuation with the compound annual growth rate of 1.84% in the company’s properties portfolio. This gives the company a growth rate of 9.17% by 2027, which is still below 2019 levels. Expansion through new building acquisitions and BetMGM has been a focal point of future spending until the former is finalized and the latter builds stronger brand loyalty. MGM Resorts International has also engaged in cost-cutting measures due to the pandemic. Notwithstanding, I forecast that the cost of goods sold as a percent of revenue will increase from 57.26% to 61.55% as the company begins revamping its existing products to achieve pre-pandemic levels.
While SG&A expenses increased to their highest levels in 2020, I expect them to decrease slowly to a percentage of 14.28% relative to revenues. This is based on an average rate from previous years that I anticipate to occur again as marketing costs decrease and as the company follows an approach of leasing buildings instead of owning them outright.
While Depreciation and Amortization reached 23.45% of revenue in 2020, I decided to disregard this value given the abnormality of the year. I decided to use 2018’s value of 10.01%, which is below 2019’s and likely significantly under 2021’s value due to the omicron variant.
When calculating the Net Working Capital, I computed a net working capital to sales ratio of -0.02%, disregarding 2020’s -0.06%.
It is important to note that BetMGM’s revenue is implicit in the total revenue and encompasses itself in the growth factors presented previously. Because it is taken as a lump sum of all the revenue streams, I believe the genuine growth factor surpasses 2019 levels but decided to maintain it to preserve a conservative approach.
The global pandemic has left MGM Resorts International at its lowest point for the foreseeable future, indicating a potential limit on the downside. MGM is in an excellent position for long-term growth, and it is taking advantage of it through its expansion plans – physically and virtually. MGM has shorts comprising 2.89% of its free float, leaving minor effects on the overall price. MGM is a solid entertainment company with 23.49% or even more significant potential upside. The company continues expanding globally and domestically. As its revenue and margin growth increases, the company is far from becoming stagnant. When the economy fully reopens, MGM Resorts International will own more properties purchased at a discount to what they would’ve cost before the pandemic.
Competition in e-commerce may be fierce, but MGM is in a solid position to split the market share with other established players such as DraftKings — resulting in an oligopoly. The company holds a liquidity advantage over its competitors and receives most of its revenues from the US, making it a safer investment in the industry. This is especially true with BetMGM, which will grow as states continue allowing sports betting. With a conservative valuation, I expect MGM Resorts International to be worth at least 23.49% more than what its current price level is trading at and recommend investors to buy the stock.