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MGM Resorts Prospects Bright on Macau Revival, Risks Stay

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On Mar 21, we issued an updated research report on global hospitality company MGM Resorts International (MGM - Free Report) .

Domestic Ventures

MGM Resorts’ Las Vegas business is doing well on the back of the ongoing economic recovery and growing tourism in the region. It is expected to continue growing over the long term driven by a strong convention calendar and the completion of several capital initiatives on the Las Vegas Strip.

The opening of MGM National Harbor, a casino resort, on Dec 8, 2016, also bodes well. Another casino resort in Western Massachusetts is set to be developed on roughly 14 acres of land in downtown Springfield, MA, the construction of which is slated for completion in late 2018. Both these resorts include a number of gaming as well as non-gaming amenities.

Thus, as a result of these efforts and openings, the company is expected to witness increased occupancy and better pricing in the domestic markets. This should drive incremental revenues at the company’s properties in the region. Moreover, these projects demonstrate the company’s commitment toward diversifying its business.

Macau Recovers

A tough operating environment in Macau weighed on the stock in 2015 and for the most part of 2016.

However, the mecca of casino gaming – Macau – has started to look up as gaming revenues in the region grew on an annual basis in February as well. This marked the seventh consecutive month of rise, signaling at steady recovery from the slump triggered by China's anti-graft corruption drive since May 2014 and slow economic growth.

We are also positive on the initiatives undertaken by the company to boost revenues and junket productivity in Macau as it anticipates a positive trend buoyed by upgrades to main gaming floor products and marketing initiatives. Resultantly, revenues at MGM China improved slightly on a year-over-year basis in fourth-quarter 2016, after witnessing consistent year-over-year declines since the second quarter of 2014. In addition, VIP table games’ revenues increased 7% in the quarter.

Moreover, MGM Cotai’s construction is in the final stages and is expected to boost revenues when it opens in the second quarter of 2017.

Also, the government of China is considering measures to support Macau’s economy in all aspects and introduce favorable policies, which are expected to improve visitation pattern and boost tourism.

Despite the improving gaming trends in Macao, we believe that it will take some time for the company to regain its past glory in the region.

Our Take

MGM Resorts’ Profit Growth Plan that was initiated in Aug 2015 has begun reaping benefits as is evident from the EBITDA growth recorded in 2016. In fact, fourth-quarter 2016 marked the seventh consecutive quarter of double-digit EBITDA growth at the company. The improving gaming trends in Macau should further drive growth.

However, MGM Resorts faces stiff competition in the markets of Las Vegas and Macau due to increased hotel openings and promotional activities.

In fact, the company’s upcoming project in the Cotai Strip is expected to face competition from several Chinese casino operators and the Sands Cotai Central project of Las Vegas Sands Corp. (LVS - Free Report) . Wynn Resorts Ltd. (WYNN - Free Report) also opened a full-scale integrated resort, Wynn Palace, on the Cotai Strip in Aug 2016.

Nonetheless, we note that MGM Resorts’ shares have outperformed the Zacks categorized Gaming industry over the past one year. While the stock surged 25.3%, the industry gained 14.6% during the same time period.

Given the company’s strong fundamentals, superior business model, extensive non-gaming revenue opportunities, high quality assets and attractive property locations, this Zacks Rank #3 (Hold) stock should keep performing well in the quarters ahead.

A better-ranked stock in this sector is Pinnacle Entertainment, Inc. (PNK - Free Report) , carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Pinnacle Entertainment’s full-year 2017 earnings climbed more than 100% over the last 60 days. Further, for 2017, EPS is expected to increase over100%.

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