MGM Resorts Looks Undervalued, Analyst Sees Japan, Sports Betting Powering Stock Higher
Posted on: September 16, 2019, 09:23h.
Last updated on: September 16, 2019, 01:37h.
MGM Resorts International (NYSE:MGM) stock entered Monday with a year-to-date gain of 19.83%, slightly trailing the S&P 500. In a research note out today, Macquarie analyst Chad Beynon said there are catalysts on the horizon that could boost shares of the Mirage operator and help the stock shed its laggard status.
Noting that investors are concerned with the company’s Macau exposure and softness among domestic VIP gamblers, Beynon points out that opportunities, such as winning a gaming license in Japan, the growing sports betting market, and the potential for some real estate assets to be monetized, are factors that currently aren’t adequately reflected in MGM’s share price. He raised his price target on shares of the Bellagio operator to $35 from $34, while maintaining an “outperform” rating.
MGM has a decent pipeline of potential value in Japan, Sports and Real Estate,” said the Macquarie analyst. “We believe Osaka would be worth $2-3ps, while Sports (Roar) could be worth $2ps if they can gain 10% domestic share. Given strong partners with MLB, NBA/WNBA and NHL, a proven technology platform (GVC), market access and a 31m database, we don’t view this to be a reach.”
Rivals are considering other Japanese metropolitan areas in their efforts to procure one of the gaming licenses there. But MGM has long been committed to Osaka, the country’s third-largest city. When Japan’s gaming market fully ramps up, it is estimated it will be number three in the world by revenue, behind only Macau and Las Vegas.
Beynon expects that MGM will grow earnings before interest, taxes, depreciation, amortization and rent costs (EBITDAR) fastest among its peers over the next two years. The analyst is forecasting a 26 percent EBITDAR growth rate, driven by the Cotai property, MGM Springfield, and Park MGM on the Las Vegas Strip.
That 26 percent EBITDAR growth projection is more than five times the estimate Beynon has on Las Vegas Sands, and more than six times the forecast he has on Wynn Resorts.
With MGM’s free cash flow (FCF) rising and the company not looking to be active with mergers and acquisitions over the near-term, Beynon sees the gaming company returning more capital to investors and reducing debt.
“We believe others in the space historically have had better capital allocation,” said the analyst. “In 1Q17, MGM implemented a dividend, and in 3Q17, implemented a share repurchase plan. With no M&A strategy and ramping FCF, MGM plans to judiciously return capital to shareholders, mainly through deleveraging and then dividend raises and repurchases.”
No Credit For Real Estate
Earlier this year, it was revealed that MGM is considering sales of the Bellagio and MGM Grand on the Strip, moves that could generate $6 billion to $7 billion before taxes. Other real estate assets owned by the company include its Macau property, MGM Springfield, and CityCenter and Circus Circus in Las Vegas.
Beynon believes the company isn’t getting the credit it deserves for its property portfolio.
“While there are a number of different real estate options, we believe MGM receives zero credit for financial engineering opportunities,” said the analyst.
The company’s real estate committee is expected to publicize recommendations, including possible asset sales, this fall.
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