Given the big gain in MGM Resorts International's stock last year, investors might be tempted to take their winnings off the table. But the casino operator still has some good cards to play in 2022.
MGM (ticker: MGM) jumped 42% last year, outperforming the broader market, as well as many travel-and-leisure names. And within the sector, it's not only well positioned to capitalize on a strong leisure recovery in Las Vegas, but it also has a promising digital business and plenty of cash for deals to help boost growth.
"It's a reopening value stock in a space where the fundamentals are extremely strong, given what we've seen since Covid began," says Chad Beynon, an analyst at Macquarie Research. He has the stock at Outperform, with a $60 price target, more than 30% above its recent price of $44 and change.
Based in Las Vegas, MGM offers a direct play on Sin City; the properties it operates on the Strip include iconic names like Bellagio, New York-New York, and Mandalay Bay. In 2019, before the pandemic, Las Vegas produced about 50% of the company's earnings before interest, taxes, depreciation and amortization, or Ebitda, according to Beynon. MGM continues to recover from the pandemic, which shut down the city for about three months, starting in March 2020.
Boosted by its Las Vegas operations, the company reported adjusted third-quarter earnings of three cents a share, compared with a loss of $1.08 a year earlier, as consolidated net revenue more than doubled to $2.7 billion.
Having so much of its 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 for conventions and trade shows, have been slower to rebound.
The fast-spreading Omicron variant is a concern, of course. Still, hotel occupancy on the Strip was nearly 80% in November, down from 83.4% in October, but more than double where it was last January.
What's more, Las Vegas is a good place to operate, relative to other markets, including Macau. That gambling center has been hit hard by the pandemic. A more recent concern for U.S.-based companies with big operations there—namely Wynn Resorts (WYNN) and Las Vegas Sands (LVS)—is the impending renewal of concession licenses.
MGM does have business in Macau, but "it has not been a big earner for them," says David Katz, an analyst at Jefferies who rates the stock a Buy, with a target of $57.
Even though MGM is well situated in Las Vegas, that's not its only important market. It boasts a portfolio of casinos in places such as Atlantic City, N.J., and outside Washington, D.C. Regional casinos, which cater more to customers who drive to the properties, rather than fly in, did well earlier in the pandemic and continue to do so.
MGM also has been evolving its business to focus on operating casino resorts, rather than owing them. In August, the company said that it would sell MGM Growth Properties (MGP), a real estate investment trust in which it held a majority stake, to VICI Properties (VICI), another REIT, for about $4.4 billion.
As of Sept. 30, MGM had about $5.6 billion of cash and equivalents. "This stockpile of cash enables them to have more M&A flexibility than most," says Katz.
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A big focus for MGM's growth has been its digital business, BetMGM.
Formed in 2018 as a joint venture with Britain's Entain (ENT.UK), BetMGM offers igaming and sports wagering—fast-growing and crucial markets 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 net revenue to total more than $800 million in 2021.
Beynon sees BetMGM becoming profitable in 2023. Says the Macquarie Research analyst: "They have the brands, the tech, and the vision to be a global digital winner."
Early in 2021, MGM tried to buy out Entain's 50% stake, but didn't succeed. There was a concern that MGM would have overpaid. The decision to pass on the deal "shows that MGM remains disciplined around its balance sheet," Beynon wrote at the time.
MGM declined to comment when asked whether it is considering another takeout bid for the joint venture. "It depends on the circumstances, but that would be an acquisition of digital growth, which under the right circumstances could be value-enhancing for [MGM], depending on what they pay," says Katz.
Meanwhile, MGM stock looks reasonably valued.
Katz said that, based on his analysis, the company's enterprise value, essentially market cap plus net debt, was trading at 9.6 times estimated Ebitda in 2023. His model suggests that the multiple should be just over 11 times.
By Beynon's calculations, the stock's traditional land-based casinos are worth $47 a share, and the online business is worth an additional $13. Viewed that way, the market isn't giving much credit for BetMGM.
One last ace in the company's hole: In April 2020, amid the early pandemic difficulties, MGM slashed its quarterly dividend from 15 cents a share to a quarter of a penny. "They could get back to paying a bigger dividend" this year or next, says Beynon.
In the meantime, MGM bought back more than $1 billion of its stock in the first three quarters of 2021—improving the odds that it will keep its winning streak alive.