MGM Resorts International (NYSE:MGM) has cut costs, improved efficiency, and consistently improved revenues over the past three years. MGM Resorts International (NYSE:MGM) reported a loss in 2012, but it managed to turn a small profit last quarter. Though revenue has been impressive, investing in a company that is unable to consistently deliver profitable quarters is risky.
Will CEO Jim Murren continue to lead MGM in the right direction so profits become commonplace? Or will it be more of the same in the future? Is there a better option in the space?
The CEO’s impact
Murren has played a big role in MGM Resorts International (NYSE:MGM)’s improved performance over the past several years. Under his leadership, MGM paid down debt and revenue grew. He has also changed the company’s focus to entertainment. Gaming still plays an important role, and the margins in the gaming segment are excellent, but Murren realized that offering more in the way of entertainment, dining, and accommodations would lead to a broader customer base.
Though Murren has helped reduce the company’s debt, MGM hasn’t escaped that debt completely. Below are the debt-to-equity ratios for MGM, Las Vegas Sands Corp. (NYSE:LVS), and Wynn Resorts, Limited (NASDAQ:WYNN).
MGM: 1.74
Las Vegas Sands: 1.11
Wynn: 0.02
These numbers make Wynn look appealing compared to its peers. However, none of these debt-to-equity ratios are overly alarming considering the industry average is 2.10. In MGM’s case, it’s likely that Jim Murren will find ways to further improve the company’s debt situation.
A good deal
MGM Resorts International (NYSE:MGM) recently made a strategic deal with Hyatt Hotels Corporation (NYSE:H). Through this agreement, Hyatt Gold Passport members will have an opportunity to earn points at 12 MGM properties. In return, MGM’s M Life members will have an opportunity to earn points at Hyatt Hotels Corporation (NYSE:H) properties.
This should be a win/win. Hyatt Hotels Corporation (NYSE:H) doesn’t have any on-strip properties, so this will help please its loyal customers. For MGM, more people will visit its properties. This, of course, increases revenue potential.
MGM expansion
MGM Resorts International (NYSE:MGM) is consistently breaking records on a quarterly basis in China, and it’s building a $3 billion resort that’s expected to be completed by 2016. In the United States, MGM might expand in Toronto, Massachusetts, and Maryland. However, Las Vegas is still the biggest revenue generator.
MGM Resorts International (NYSE:MGM) owns more real estate on the Las Vegas Sands Corp. (NYSE:LVS) strip than any other company. And it’s planning to add to this ownership domination by building an outdoor retail and restaurant park as well as a 20,000-square-foot arena. These moves relate to an earlier point, showing that MGM is more focused on the average consumer than just gamblers.
Conventions in Las Vegas Sands Corp. (NYSE:LVS) had slowed after the financial crisis of 2008 and 2009. Many companies were cutting costs at a substantial rate at the time, and the popular theory was that employees shouldn’t be exposed to temptations while working. This theory made sense, and it’s likely to return one day. For now, the convention business is healthy in Las Vegas, and according to Jim Murren, it will pick up even more in 2014. This would be a major plus for MGM.
MGM vs. peers
On a comparative basis, Wynn Resorts, Limited (NASDAQ:WYNN) impressed the most for debt management. But what about valuation and dividend yield?
| Forward P/E | Dividend Yield | |
|---|---|---|
| MGM | 137 | No Yield |
| Las Vegas Sands | 17 | 2.50% |
| Wynn | 19 | 3.00% |
MGM is trading at 137 times forward earnings. This indicates that expectations are much higher for MGM than they are for peers. MGM also falls short in yield.
Conclusion
MGM Resorts International (NYSE:MGM) is a good indicator of consumer discretionary income. Considering that MGM’s top-line growth has been good, plenty of people out there are making money. This is good news for Las Vegas.
However, this performance likely relates to stock market and housing market gains. Since this isn’t a jobs-based recovery, it’s not a natural recovery. Therefore, nobody can predict the longevity of the current run in stocks and real estate. If interest rates increase and speculation finally comes to a halt, then MGM, Las Vegas Sands, and Wynn Resorts, Limited (NASDAQ:WYNN) would all be dangerous investments.
For those who want to play the rally, you might want to consider the highest yield and best debt management with Wynn.
The article Should You Wager on this Casino Resort Company? originally appeared on Fool.com and is written by Dan Moskowitz.
Dan Moskowitz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Dan is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.
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