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MGM Resorts Up 22% in 6 Months: Can the Bull Run Continue?

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MGM Resorts International (MGM - Free Report) is gaining momentum on the back of strong portfolio, resort openings, other entertainment offerings in the pipeline and solid focus on non-gaming activities. Evidently, shares of the company have gained 21.8% in the past six months compared with the industry’s 9% growth. However, increasing competition, high-debt burden and trade war between the U.S. and China are concerning.

Let us discuss why investors should hold on to the stock for the time being.

Factors Driving Growth

MGM Resorts, one of the leading companies in the gaming and lodging industry, is well poised to grow on high brand awareness. The company’s superior business model, extensive non-gaming revenue opportunities, high-quality assets and attractive property locations are the primary growth drivers. In the past few years, the company has taken various initiatives to align every recognized brand into one global entertainment brand. This resulted in a disciplined business model with a unified view of strategy.

Furthermore, this January, MGM Resorts undertook a growth initiative called MGM 2020 and have been following up on that plan. If executed efficiently, MGM 2020 will deliver $200 million of EBITDA in 2020.  The company expects to achieve $100 million of EBITDA in 2019, up from $70 million last year. It also continues to work toward reducing consolidated net leverage to 3-4 times by the end of 2020. In third-quarter 2019, the company achieved cost savings on approximately $50 million, courtesy of MGM 2020 initiatives.



Notably, MGM derives a solid share of its revenues from Macau — the largest gaming destination in the world. It is undertaking initiatives to increase revenues and junket productivity in Macau, and anticipates a positive trend buoyed by upgrades to main gaming floor products and marketing initiatives.

On the domestic front, the company’s Las Vegas business is likely to perform well on the back of an improving economic scenario and increased tourism numbers. Meanwhile, the company continues to make important investments wherever it sees an opportunity.

Hurdles

The trade war between Beijing and Washington is persistently hurting gambling stocks and MGM Resorts is no exception. Moreover, the flagging China property price has adversely impacted the high-end VIP segment. MGM Resorts has been offering various promotional allowances and undertaking initiatives to attract gambling patrons in Macau. The companies face substantial threat on the face of a potential outbreak of a trade war.

MGM Resort’s heavy reliance on debt financing is an added concern. As of Sep 30, 2019, cash and cash equivalents were $1,233.6 million, whereas long-term debt totaled $14.9 billion. However, any severe slowdown in future macroeconomic and credit market conditions can affect the company’s ability to pay or refinance debt.

MGM Resorts’ baccarat business has been facing some headwinds from the fourth quarter of 2018. So far in 2019, the business has been affected by fewer visits from certain Far East players and a lower hold. Also, gaming revenues declined 3% in the third quarter due to the high-end baccarat business.

Zacks Rank & Key Picks

MGM Resorts has a Zacks Rank #3 (Hold). Some better-ranked stock in the Consumer Discretionary sector are Vista Outdoor Inc (VSTO - Free Report) , YETI Holdings, Inc (YETI - Free Report) and Studio City International Holdings Limited (MSC - Free Report) . Vista Outdoor and YETI Holdings sport a Zacks Rank #1 (Strong Buy), whereas Studio City carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Vista Outdoors’ current-year earnings are expected to rise 14.3%.

YETI Holdings has three-five year expected earnings per share growth rate of 15.8%.

Studio City surpassed estimates in all of the trailing four quarters, the average being 90%.

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