We maintain our Neutral recommendation on the casino-resort operator MGM Resorts International (MGM - Free Report) . While we view the company’s busy event schedule in 2013, strong international growth and various domestic ventures favorably, a high debt profile and a still-fragile Las Vegas market keep us on the sidelines.
Why the Reiteration?
Given its strong brand name, we believe that MGM Resorts is better positioned to command a premium rate relative to the overall gaming and lodging industry. MGM expects to earn strong revenue per available room (RevPAR) in 2013. The company’s convention bookings for 2013 appear to be strong along with growing leisure bookings. MGM has several major events scheduled for the first quarter of 2013, which should drive the casino-resort operator’s sales ahead.
MGM derives a solid share of its total revenues from Macau, the largest gaming destination in the world. The VIP business in Macau, which witnessed a slowdown of late owing to a weakening Chinese economy, appears to be back on track. MGM anticipates a positive trend in Macau in 2013 buoyed by gradual recovery in VIP gaming, upgrades to main gaming floor products, marketing initiatives as well as substantial growth in Macau mass market gaming revenues.
MGM is also progressing well with its casino-hotel development project in Cotai. Management officially signed a land concession deal for the Cotai project in 2012. Apart from focusing on the overseas market, MGM is also investing heavily in the domestic arena.
However, heavy reliance on debt financing remains a cause for concern. So, any severe slowdown in future macroeconomic and credit market conditions can adversely affect the company’s ability to pay or refinance its debt.
Moreover, though the economy is showing some signs of improvement, we believe that recovery, particularly in the Las Vegas market, remains slow due to challenging economic conditions on a domestic level.
Hence, at the current level, we remain cautious and prefer to take a wait and see approach till we find some greater evidence of an outperformance
Other Stocks to Consider
Some other gaming industry stocks with a favorable Zacks Rank include Bally Technologies Inc. and Multimedia Games Inc. , both with a Zacks Rank #2 (Buy). Cracker Barrel Old Country Store Inc. (CBRL - Free Report) , a restaurant industry stock with a Zacks Rank #1 (Strong Buy), also warrants a look at current levels.
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