MGM Resorts: Strong Earnings, but Debt Is High

MGM Resorts International (MGM) is a holding company that engages in the ownership and operations of casino resorts. The firm’s casino resorts offer gaming, hotel, convention, dining, entertainment, retail, and other resort amenities.

MGM operates through the following business segments: Las Vegas Strip Resorts, Regional Operations, and MGM China. The Las Vegas Strip Resorts segment comprises the Bellagio, MGM Grand Las Vegas, Mandalay Bay, The Mirage, Luxor, and other resorts.

Shares of MGM Resorts International have gains of ~1% year-to-date and approximately 26% in the past year. The company reported strong fourth-quarter 2021 financial results, signaling an economic recovery after a very bad 2020 year. I am bearish on MGM stock as the company has a heightened level of debt, and it remains expensive.

Some may include it as a long-term rebound play in the casino industry as COVID-19 should fade gradually, and the travel industry should witness a pre-pandemic recovery. Its future earnings reports will show whether MGM’s recovery is sustainable and momentum remains.

MGM Resorts International Q4 2021 and Full-Year 2021 Financial Results

MGM stock earnings have rebounded gradually from losses in 2020 when the pandemic hit the world and the entertainment and gambling industry amid global lockdowns and travel restrictions. EPS GAAP of $0.23 was a beat by $0.21, and revenue was a beat by $299.14 million.

Some notable Q4 2021 financial highlights include an increase of consolidated net revenues to $3.06 billion or growth of 104.6% year-over-year, adjusted EPS of $0.12 compared to ($0.90) in Q4 2020, and net income of $131 million versus a loss of ($448 million) in the same quarter a year ago.

Revenue at Las Vegas Strip Resorts in Q4 2021 increased 26% versus Q4 2019, but revenue at MGM China decreased 57% to $315 million versus $727 million in Q4 2019.

Turning to full-year 2021 financial results, consolidated net revenues increased to $9.68 billion, representing an 87.5% increase compared to consolidated net revenues of $5.16 billion in 2020, net income rose to $1.25 billion versus a loss of ($1.03 billion) in 2020, and adjusted EPS reported was a loss of ($0.67) versus ($3.94) in 2020.

Earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR), which is a non-GAAP tool used to measure a company’s financial performance, increased in 2021 for Las Vegas Strip Resorts but declined for MGM China.

In 2021, MGM Resorts International repurchased $1.75 billion of shares of common stock, and at the end of Q4 2021, the company’s long-term debt was $11.77 billion, reduced from $12.46 billion as of Dec 31, 2020.

“Our record fourth-quarter results are a testament to our talented team across the globe, our sharpened focus on operational efficiency, and the proven resiliency of demand for the service and experiences that we provide at MGM Resorts,” said Bill Hornbuckle, Chief Executive Officer and President of MGM Resorts International.

MGM Resorts International has stated that it plans to maximize shareholders’ value by pursuing three main priorities.

The priority is to maintain a strong balance sheet, the second is to return cash to shareholders, and the third one is to invest in targeted growth opportunities.

Fundamentals – Risks

MGM Resorts International, as of the latest quarter, had a debt/equity ratio of ~4, which is high. With the exception of an uptick in 2021, gross margins have been declining since 2017. Revenue per share is still lower than where it was in 2018 and 2019, and financial strength is poor. The interest payments of the firm on its debt are not well covered by EBIT, with an interest coverage ratio of 0.7x.

Valuation

MGM stock has a forward (FWD) EV/EBIT ratio of 48, a price/sales (FWD) ratio of 1.6, and a P/E GAAP (FWD) ratio of 47.8. The median values for the Consumer Discretionary sector are 12.6, 1.1, and 15.2 for the EV/EBIT (FWD), price/sales (FWD), and P/E GAAP (FWD) ratios, respectively. Overall, MGM stock is trading at a large premium.

Wall Street’s Take

MGM Resorts International has a Moderate Buy consensus rating based on six Buys and five Hold ratings assigned in the past three months. The average MGM Resorts price target of $57.91 represents 28% upside potential.

Conclusion

MGM Resorts International had a very strong Q4-2021 earnings report and a strong full-year 2021, signaling a rebound to its business operations. China’s operations remain a drag on total financial performance while Las Vegas operations lead the way to a brighter 2022.

The company has strengthened its balance sheet, but still, it incurs a lot of debt. From a forward valuation, the stock remains expensive.

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