MGM Resorts International (MGM - Free Report) is scheduled to report fourth-quarter 2017 results on Feb 20, before market opens.
The company’s strong business model, extensive non-gaming revenue opportunities, high quality assets and attractive property locations are likely to drive the top line in the fourth quarter. However, costs associated with sales building and an alarming debt pressure might dent earnings in the to-be-reported quarter.
MGM Resorts’ shares have gained 11.9% in the past year, underperforming the industry’s gain of 25.1%.
Let’s look deeper into how the company will shape up in the to-be-reported quarter.
Sales-Building Efforts to Drive Top Line
The Zacks Consensus Estimate for fourth-quarter revenues is pegged at $2.49 billion, reflecting 1.4% year-over-year growth. We believe that strong sales-building initiatives like digital technology maximization, opening of resorts and providing non-gaming activities when coupled with a robust presence, are favoring the top line.
MGM Resorts utilizes various types of technology to maximize revenues and efficiency in operations. The company continues to adopt ways that drive bookings. To this end, MGM Resorts implemented an M life Rewards program for its customers at domestic resorts that can be redeemed at restaurants, box offices or M life front desk at participating properties to ensure guest loyalty. Moreover, MGM Macau’s loyalty program, Golden Lion Club meets the needs of a range of customers. Also, the company’s website, mlife.com continues to generate substantial revenues.
The company’s strong domestic presence and improving tourism market in Las Vegas is also aiding the top line. Apart from gaming services, the company also includes hotel, food, beverage and entertainment that attract greater number of customers and drive revenues. These initiatives are likely to reflect in the to-be-reported quarter’s revenues.
MGM also derives a solid share of its revenues from Macau, the largest gaming destination in the world. Per the Macau Gaming Inspection and Coordination Bureau, gross gaming revenues increased in all the three months of the fourth quarter, thereby continuing the revival in Macau. This, in turn, is likely to boost revenues at MGM China in the to-be-reported quarter.
Debt Pressure & High Costs Likely to Dent Earnings
The consensus estimate for fourth-quarter earnings is 7 cents, mirroring a 36.4% year-over-year decline.
One of the factors that can affect the company’s earnings is its heavy reliance on debt financing. Although debt can be used to lever up earnings, a wrong mix of debt and equity can lead to bankruptcy. As of Sep 30, 2017, cash and cash equivalents were nearly $2 billion against a much higher long-term debt of $13 billion.
Moreover, the company has been grappling with high labor costs and expenses associated with technological initiatives. These costs are likely to put pressure on the company’s margins in the to-be-reported quarter and hurt the bottom line.
Our Quantitative Model Predicts a Beat
MGM Resorts has the right combination of two main ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.
Zacks ESP: The company has an Earnings ESP of +42.50%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.
Zacks Rank: MGM Resorts has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Meanwhile, we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.
MGM Resorts International Price and EPS Surprise
Other Stocks to Consider
Here are a few other stocks from the Consumer Discretionary sector that investors may consider, as our model shows that they also have the right combination of elements to post an earnings beat this quarter:
Choice Hotels (CHH - Free Report) has an Earnings ESP of +1.84% and a Zacks Rank #2. The company is scheduled to report quarterly numbers on Feb 20.
Churchill Downs (CHDN - Free Report) has an Earnings ESP of +29.03% and a Zacks Rank #1. The company is slated to report quarterly results on Feb 27.
Clarus Corporation (CLAR - Free Report) has an Earnings ESP of +2.86% and a Zacks Rank #3. The company is expected to report quarterly numbers on Mar 5.
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