MGM Resorts (MGM) Gains From Macau Business Amid High Debt

MGM Resorts International (NYSE:MGM) gains from gaming and non-gaming businesses. The company’s strong portfolio, resort openings, a few other entertainment offerings in the pipeline and focus on non-gaming activities bode well for long-term growth. However, high debt, margin pressure from various initiatives and increased competition raise concerns.

In the first quarter of 2019, the company’s earnings of 12 cents missed the Zacks Consensus Estimate of 16 cents and also declined sharply from 34 cents registered in the prior-year quarter.

Weak margins have also led MGM Resorts’ shares underperform the industry so far this year. The company’s shares have gained 6.4% in this period, underperforming the industry’s 13.8% rally.

Let us delve deeper into the factors that are currently shaping up the company’s performance.

Strong Brand and Macau Business Aid

In the past few years, MGM Resorts has taken various initiatives to align every recognized brand into one global entertainment brand. This resulted in a disciplined business model, with a unified view of strategy. Meanwhile, with a gradual economic recovery in the United States, the company’s business seems to improve further. Moreover, a few other new entertainment offerings in the pipeline are expected to deliver increased profitability across its properties.

MGM Resorts devised a growth initiative called MGM 2020 back in January, It has been following up on that plan. The plan, if executed efficiently, will deliver $200 million of EBITDA in 2020. In fact, the company expects to witness strong second half to 2019 and gain financial benefits from MGM 2020. It also continues to work toward reducing consolidated net leverage to 3-4 times by the end of 2020.

MGM derives a solid share of its revenues from Macau, the largest gaming destination in the world. It is undertaking initiatives to increase revenues and junket productivity in Macau, and anticipates a positive trend, buoyed by upgrades to main gaming floor products and marketing initiatives. Furthermore, the opening of MGM Cotai in February 2018 significantly boosted revenues in 2018. Notably, revenues at MGM China improved 23% on a year-over-year basis in the first quarter of 2019. Revenues have also improved in the past eight quarters.

Concerns

MGM Resorts is facing heavy competition from the likes of Wynn Resorts (NASDAQ:WYNN) and Las Vegas Sands (NYSE:LVS) . Also, other hospitality chains are posing major threats to the company’s profitability.

Meanwhile, MGM Resort’s heavy reliance on debt financing remains a concern. As of Mar 31, 2019, cash and cash equivalents were $1.2 billion, whereas long-term debt of $14.7 billion was much higher. However, any severe slowdown in future macroeconomic and credit market conditions can affect the company’s ability to pay or refinance debt.

MGM Resorts’ baccarat business has been facing some headwinds from the fourth quarter of 2018. In the first quarter of 2019, the business was affected by fewer visits from certain Far East players and a much lower hold. The total impact to the quarter was approximately $35 million of EBITDA. Also, gaming revenues declined 13% due to the high-end baccarat business.

Zacks Rank & Stock to Consider

MGM Resorts currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the gaming space is Century Casinos (NASDAQ:CNTY) , currently carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Century Casinos’ current-year earnings are likely to witness 236.4% growth.

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