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MGM Resorts Rides on Solid Domestic Business, Risks Prevail

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On Aug 31, we issued an updated research report on global hospitality company MGM Resorts International (MGM - Free Report) .

Though the company has solid long-term growth potential but the risks from near-term headwinds might somewhat restrict its growth momentum.

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.

Notably, the acquisition of full ownership of Borgata Hotel Casino & Spa — Atlantic City’s top casino — complements MGM Resorts’ increasing presence in the Northeastern United States and should continue to drive top-line growth.

Meanwhile, MGM National Harbor, a casino resort that opened in December 2016 is off to a great start. 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 to be completed in late 2018. Both these resorts include a number of gaming as well as non-gaming amenities.

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

Macau’s Recovery & Regulatory Issues

A tough operating environment in Macau weighed on casino stocks from June 2014 to most part of 2016. However, Macau's gambling revenues marked a turnaround and have been rising since the second half of 2016 with new resorts attracting high rollers as well as leisure gamblers. In fact, Macau’s gaming revenues were up in July, thus marking the 12th consecutive month of gains and signaling the casino hub’s recovery.

Markedly, after been mostly weak for the last two years, the VIP business in Macau has started to recover. Meanwhile, the main floor gaming has also been mostly faring well in the recent times. Additionally, MGM China is undertaking initiatives to increase revenues and junket productivity in Macau as it anticipates a positive trend buoyed by upgrades to main gaming floor products and marketing initiatives. MGM Cotai’s construction too is in the final stages and is expected to boost revenues when it opens in the fourth quarter of 2017.

Thus, though it seems that the worst is over for Macau’s gambling industry, it will still take some time for the company to fully capitalize on the rebound in Macau gaming revenues. This is evident from the company’s weak results at MGM China in the second quarter. Notably, revenues declined 1% in the quarter due to lower revenues from main-floor table games.  

However, the Macau government recently joined hands with the mainland authorities to tackle money laundering and terrorism financing and beefed up its anti-money laundering framework with a much wider scope and stringent compliance measures. Macau's Gaming Inspection and Coordination Bureau (DICJ) is increasing its audits of the junket industry, over worries of money laundering as well.

Thus, this latest crackdown may hamper Macau’s revenue growth and reverse the 12 month streak of year-over-year gains, thus weighing down on MGM Resorts’ performance.

Bottom Line

MGM Resorts’ Profit Growth Plan continues to bear fruit as being reflected in improving profits. Evidently, the second quarter of 2017 marked the ninth consecutive quarter of double-digit EBITDA (earnings before interest, taxes, and amortization) growth at the company.

Nevertheless, the company 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 August 2016.

Despite the headwinds, we note that MGM Resorts’ shares have rallied 19.4% in the last six months, outperforming 15% gain of the industry it belongs to.

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 is likely to keep performing well in the quarters ahead.

A better-ranked stock in this sector is Melco Resorts & Entertainment Limited (MLCO - Free Report) , sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Melco Resorts’ full-year 2017 earnings climbed 8.6% over the last 60 days. Further, for 2017, EPS is expected to increase nearly 99%.

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