MGM Resorts International (MGM) hit a new 52-week high during intraday trading on November 7. The stock is now up 119.96% since I added it to my Jubak Picks portfolio back on May 4, 2012.
Shouldn’t I just take my profits and run?
Well, Yes if all the catalysts that would drive this stock higher are exhausted. No, if they’re not.
Which is it with MGM Resorts?
Let’s do a survey of the four catalysts I see for the stock. (To readers who aren’t going to read any further than this, I’d note that the Japanese legislature is scheduled to vote on permitting casino gambling in Japan on November 9. The stock will pop on a “Yes” vote. Later in this post I’ll look at the odds on that vote.)
Catalyst #1. Back in 2012 one big reason to buy MGM Resorts was the odds that the company would be able to fix its over-extended balance sheet short of bankruptcy. The company sold off some assets, restructured other debt, and created a new REIT as a way to fund some expansion. The result was the company moved away from bankruptcy. Banks are now willing to lend the company money again to expand. This catalyst seems exhausted. While MGM Resorts still carried $12.4 billion in long-term debt at the end of 2015, I don’t see the stock getting a big bounce from further debt reduction. The markets just aren’t very worried about the company’s balance sheet–after all it just finished the third quarter with cash on hand of $1.4 billion. I’d check this catalyst off as “Done.”
Catalyst #2: Back in 2012, the Las Vegas market had slumped and gaming and hotel revenues on the Strip, where MGM Resorts controls 30% of all rooms, had taken a big hit from the Great Recession. Now Las Vegas is back so strongly that in the third quarter, reported on November 7, it carried the company. Revenue from the company’s U.S. properties grew by 16% to $1,9 billion, Occupancy rates climbed one percentage point to 97%. RevPAR, that’s revenue per available room, grew 11% for the company’s properties on the Las Vegas Strip. MGM is in the process of building out the massive City Center development in Las Vegas, though, and I think there’s still upside to revenue from U.S. properties. I’d call this catalyst “Partially done,” If this were all that MGM Resorts had going for it, I don’t think I’d hold onto the shares here. The City Center development has big potential but it faces competition from other new properties now on the planning books.
Catalyst #3: A recovery in the Macao market was on the horizon back in 2012 but it’s been a long time coming. In the most recent quarter MGM Resorts saw a 6% drop in revenue from MGM China. Besides the industrywide slowdown in Macao as a result of the Chinese government’s anti-corruption campaign and the resulting crackdown on conspicuous consumption and VIP gambling tours, MGM was slow to move to the new Cotai strip, which has become the growth area for Macao’s casinos. MGM’s new Cotai casino, the company’s second in Macao, looks like it will open in 2017 and that would provide, finally, the big bump to MGM Resorts’ revenue from Macao that investors have been waiting for. Macao gaming revenue looks to have turned around too. Gaming revenue rose 8.8% in Macao in October. This catalyst counts as “Still on the way.”
Catalyst #4: On November 9 the Japanese legislature is scheduled to vote, again, on legalizing casino gambling in Japan. This time, though, the fix looks to be in. In the last two votes in 2013 and 2015, the measure failed because of an unrelated political scandal (2013) and a fear that permitting casino gambling would increase the country’s already high rate of gambling addiction. (An estimated 5% of the Japanese population suffers from a gambling addiction versus 1% in other wealthy economies.) But this time around Japanese Prime Minister Snhinnzo Abe reshuffled the leadership of his Liberal Democratic Party to put three pro-casino officials in top slots. The Abe government has also repeatedly argued that casinos would bring much needed tourism revenue to Japan and thus provide a boost to Japan’s economic growth. I expect the measure to pass this time and to produce a pop in shares of MGM Resorts, and competitors such as Wynn Resorts (WYNN) and Las Vegas Sands (LVS.) I’d rate this catalyst as “On the way.”
So after that scorecard, I’m keeping MGM Resorts in my Jubak Picks portfolio and raising my target price to $30 a share from the current $26.