Why Is The Market Rewarding MGM Resorts Stock?

The shares of MGM Resorts (NYSE: MGM) have been observing investor optimism despite sharp declines reported by peers, Wynn Resorts and Las Vegas Sands. In recent years, MGM’s peers have been betting big on their Macau operations while MGM maintained geographical diversity as well as enhanced its digital presence. Casino stocks have observed many hiccups lately with the resurgence of Covid cases in China, uncertainty surrounding the modalities of casino license extension in Macau, and high competitive rivalry in digital gaming business in the U.S. Per annual filings, MGM Resorts has just 24% of its long-term debt linked to the construction, renovation, and other financing activities in Macau, which is much lower than 50% Macau related debt of Las Vegas Sands and Wynn Resorts. Despite the steep fall in MGM Resorts revenues in the past two years, the company is likely to observe strong top line expansion in 2022.

How did MGM Resorts perform during the pandemic?

In 2021, MGM Resorts reported an 87% (y-o-y) growth in total revenues largely assisted by its Las Vegas and Regional properties. Before the pandemic, the company’s Las Vegas, Regional, and China operations contributed 47%, 29%, and 24% of total revenues, respectively – with a similar share of total profits. Interestingly, the company’s Vegas and Regional operations assisted the bottom line as the profits (adjusted EBITDA) from MGM China declined by 97% from pre-pandemic levels to just $25 million. In 2021, the cash from operations came in at $1.3 billion despite total revenues being 25% below pre-pandemic levels. This can be largely attributed to gaming taxes (included in casino expenses) which increase/decrease in proportion to operating revenues. However, the company’s adjusted property EBITDA increased from 26% in 2019 to 30% in 2021, even though the MGM China operations were down by 70% over the same period.

Stock Has Moved In Sync With Markets

MGM stock declined from levels of around $31 in February 2020 (pre-crisis peak) to levels of around $9 in March 2020 (as the markets bottomed out), implying MGM stock lost 70% from its approximate pre-crisis peak. It observed a strong rally post broader market sell-off and has reached $42 at present – nearly 30% above pre-pandemic levels. In comparison, the S&P 500 Index first fell 34% as lockdowns were imposed in many countries and currently is almost 30% above February 2020 levels.

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[1] Month-to-date and year-to-date as of 4/22/2022
[2] Cumulative total returns since the end of 2016

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