Why MGM Resorts Has Growth Potential
MGM Resorts International (NYSE:MGM) could record further stock price growth, in my view, after its 17% gain in the past year.
The casino operator is making significant changes to its business model that could improve its financial situation. It also has growth potential within the sports betting market following its partnership deal with Yahoo.
Refreshed business model
The company is in the process of making major changes to its business model. Previously, MGM owned the real estate from which its casinos operate. It now intends to sell a large proportion of its properties to reduce the total amount of real estate that it owns. This could lead to the company having less debt and greater financial strength from which to invest in growing its business.
For example, it announced the sale of its Bellagio casino's real estate in the fiscal 2019 third quarter. This represents its first major sale of real estate as part of its new strategy. The company expects the sale to raise cash of $4.3 billion, and it will use part of this sum to strengthen its balance sheet through debt reduction.
The change in MGM's strategy allows the company to fully focus on its core strength of managing casinos rather than managing its real estate. The company expects the strategy to boost its cash flow, which could provide it with a larger amount of capital to expand its portfolio of casinos. It also reduces the company's overall risk, since it will have less debt. This could improve investor sentiment towards the stock in the upcoming years.
Sports betting partnership
The business announced a partnership with Yahoo Sports in its fiscal 2019 third quarter. This will combine MGM's sports betting operations with Yahoo's fantasy sports and online content network. It will allow Yahoo's 60 million users to quickly and easily place bets through MGM's sports betting operations on sporting events that they are watching online.
This could increase the number of visitors to MGM's online sports betting service, since it has found that when people are watching sports they are more likely to place bets on it. The partnership with Yahoo Sports could catalyze MGM's financial performance since the U.S. online sports betting market is forecast to grow rapidl, potentially generating annual revenues of $7 billion by 2025.
Potential challenges
The company's financial performance in the third quarter was mixed. For example, its casino gaming revenues declined 3% and its table games revenue dropped 12% compared to the same quarter of the previous year. In addition, its Macau operations experienced weak levels of demand that have been present throughout the 2019 fiscal year. This contributed to MGM's Macau business reporting a 14% reduction in profit compared to the fiscal 2018 third quarter. This trend could continue in the near term and may negatively impact on the company's profit growth.
In response, MGM is improving the efficiency of its business. It achieved cost savings of $50 million in the third quarter, and it expects to make further cost reductions in fiscal 2020. It is also offsetting the weaker parts of its business with strong performances elsewhere. For instance, its convention bookings in Las Vegas reported robust demand in the third quarter that contributed to a 6% rise in the company's non-casino revenues. It expects this trend to continue, according to its third quarter results, which could catalyze its bottom line.
Outlook
Market analysts forecast that MGM will report a 33% annual rise in its earnings per share between fiscal 2018 and fiscal 2020. Its forward price-earnings ratio of 22.5 suggests that it offers good value for the money as it delivers its revised growth strategy.
Disclosure: the author has no position in any stocks mentioned.
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This article first appeared on GuruFocus.
