MGM Resorts Stock Not Getting Enough Vegas Love, Says Analyst

MGM Resorts International (NYSE:MGM) is the largest operator on the Las Vegas Strip, meaning its stock is highly tethered to recovery in the largest US casino center. But one analyst believes the gaming equity isn’t getting the credit it deserves.

In a note to clients today, Deutsche Bank analyst Carlo Santarelli upgrades MGM stock to “buy” from “hold” while lifting his price target to $54 from $42. That new forecast implies upside of 25 percent from the June 23 close. Shares of the Aria operator are up nearly 37 percent, good for one of the best showings among large-cap gaming equities.

We believe the next leg of the stock story for MGM is likely to be one of improving margins that extend well beyond the ‘over 30 percent’ targets management has discussed as the Las Vegas Strip goal, as well as the 32.5 percent peak margins of 2006,” said Santarelli in the note.

In the wake of the coronavirus pandemic, margin expansion is an increasingly prominent theme for gaming companies and the analysts and investors that follow them. The crisis forced operators to look for efficiencies, and some are pondering for how long leaner cost models are tenable as Las Vegas returns to normal.

MGM Stock Loving Las Vegas

Not surprisingly, MGM has long been one of Wall Street’s favorite ideas as a way to help recovery in the largest US casino hub.

Today, Las Vegas is rebounding mightily, as is MGM stock. That’s happening before the return of vital convention business and in advance of some other factors that could be beneficial to the Mirage operator.

Deutsche Bank’s Santarelli pointed to “continued improvements in Las Vegas, with the outlook further buoyed by improving group trends and a Raiders season with fans in the stadium.”

Surprising Comments on BetMGM

While the analyst is broadly bullish on MGM stock, he views contributions from the BetMGM business as perhaps overvalued.

We see our year Consensus as being too low and, accordingly, the perceived embedded sports/iCasino valuation as too high,” he said.

BetMGM is a 50/50 joint venture between the casino giant and UK sportsbook operator Entain Plc (OTC:GMVHY). It’s the third-largest online sportsbook operator in the US, trailing only FanDuel and DraftKings, and is already the dominant name in the fast-growing internet casino space.

Because BetMGM is a joint venture, MGM doesn’t enjoy all of the economic benefits of the business. That’s likely why some analysts believe the casino company will make another acquisition offer for Entain after being rebuffed by the firm earlier this year.