MGM’s Winning Streak Doesn’t Have to End. Here’s Why.

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Seeing Big Growth at MGM Resorts International‘s
Stocks last year, investors may be tempted to take their winnings off the table. But the casino operator still has some good cards to play for in 2022.

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MGM (ticker: MGM) jumped 42% last year, outperforming the broader market as well as many travel-and-leisure names. And within the region, it’s not only well-positioned to capitalize on a strong holiday recovery in Las Vegas, but it also has a promising digital business and plenty of cash for deals that help fuel growth. .

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“This is a value stock reopening in a position where fundamentals are extremely strong, which we’ve seen since the start of Covid,” says Chad Bayon, an analyst at Macquarie Research. He has the stock to outperform with a $60 price target, which is 30% higher than the recent $44 price and change.

Based in Las Vegas, MGM presents a live play on Sin City; Properties it operates on the Strip include iconic names like Bellagio, New York-New York and Mandalay Bay. According to Bayonne, in 2019, before the pandemic, Las Vegas produced about 50% of the company’s earnings before interest, taxes, depreciation and amortization, or EBITDA. MGM continues to recover from the pandemic, which shut down the city for almost three months starting in March 2020.

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Buoyed by its Las Vegas operations, the company reported an adjusted third quarter earningsf three cents per share, compared to a loss of $1.08 a year ago, consolidated net revenue more than doubled to $2.7 billion.

Having this much business in Las Vegas has been a plus. The gambling mecca has made a strong recovery from the pandemic, especially among leisure customers. Business and group travel, including conventions and trade shows, has been slow to rebound.

The rapidly spreading Omicron variant is certainly a concern. Still, hotel stays on the Strip were up nearly 80% in November, up from 83.4% in October, but more than double that of the previous January.

In addition, Las Vegas is a good place to operate relative to other markets, including Macau. That gambling center has been hit by the pandemic. Another recent concern for US-based companies with large operations there—such as Wynn Resorts (WYNN) and Las Vegas Sands (LVS)—is the imminent renewal of discounted licenses.

MGM is business in Macau, but “it hasn’t been a big earner for them,” says David Katz, an analyst at Jefferies who buys the stock with a target of $57.

Even though MGM is well located in Las Vegas, this is not its only important market. It boasts a portfolio of casinos outside the Atlantic City, NJ and Washington, DC regional casinos that cater more to customers who, rather than drive into properties that did well earlier in the pandemic and continue to do so. Huh. ,

MGM is also developing its business to focus on operating casino resorts, not their cause. In August, the company said it would sell MGM Growth Properties (MGP), a real estate investment trust in which it has a majority stake, to another REIT, VICI Properties (VICI), for about $4.4 billion.

As of September 30, MGM had approximately $5.6 billion in cash and equivalents. “This stockpile of cash enables them to have greater M&A flexibility,” says Katz.

Baron’s Stock Picks

A major focus for MGM’s growth has been its digital business, BetMGM.

Founded in 2018 as a joint venture with UK-based Enten (ENT.UK), BetMGM offers gaming and sports wagering—a rapidly growing and important market in the gambling business. BetMGM isn’t profitable yet, but MGM said on its third-quarter earnings call in early November that it expects that segment’s total revenue to exceed $800 million in 2021.

Bayonne sees BetMGM turning profitable in 2023. Says Macquarie Research Analyst: “They have the brand, technology and vision to become a global digital champion.”

In early 2021, MGM tried to buy Aten’s 50% stake, but did not succeed. There was a concern that MGM might have paid more. Bayonne wrote at the time that the decision to pass the deal “shows that MGM remains disciplined around its balance sheet.”

When asked whether it is considering another takeout bid for the joint venture, MGM declined to comment. “It depends on the circumstances, but it will be the acquisition of digital growth, which can be a value-add under the right circumstances. [MGM], depending on what they pay,” Katz says.

Meanwhile, MGM stock looks reasonably priced.

Katz said that, based on his analysis, the company’s enterprise value, essentially market cap plus net debt, was trading at 9.6 times projected EBITDA in 2023. His model suggests that the multiplier should only be greater than 11 times.

By Baynon’s calculations, the stock’s traditional land-based casino is valued at $47 per share, and the online business is valued at an additional $13. Viewed this way, the market is not giving BetMGM much credit.

One last ace in the company’s hole: In April 2020, amid the early hardships of the pandemic, MGM slashed its quarterly dividend from 15 cents per share to a quarter penny. “They may come back this year or next year to pay a bigger dividend,” Bayon says.

Meanwhile, MGM bought back more than $1 billion of its stock in the first three quarters of 2021 — improving the chances that it will keep its winning streak alive.

Write Lawrence C. Strauss at [email protected]

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