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MGM Resorts International (MGM): One for the watch list
03/20/2012 3:15 pm EST
If you’re looking for the fastest current growth in the gambling sector, especially among the companies positioned to reap the rewards of growth in Macau, Singapore, and other Asian gambling hot spots, I suggested in my March 8 post going with Las Vegas Sands (LVS) or even better the company’s Macau unit Sands China (1928.HK) For more on the sector as a whole and how I’d handicap the players, see my March 8 post http://jubakpicks.com/
But if you’re looking for value—and a chance to make good profits with lower risk—I’d go with MGM Resorts International (MGM) on any pull back from today’s $14.22 (as of 3 p.m. New York time) to $13.30 or less. (While I’m waiting, I’ll put this on my watch list http://jubakpicks.com/ )
What has put the stock on my radar screen? On March 16, MGM Resorts sold $1 billion in bonds--$250 million more than the company initially sought to sell—at “just” 7.75% on these 10-year notes. That’s down from 8.625% on the seven-year notes the company sold in January. And Standard & Poor’s changed its outlook on B- rated MGM to positive today.
MGM Resorts hasn’t sold debt this cheaply since it sold bonds at 7.5% in May 2007. And this B- rating is pretty heady stuff for a company that was rated CCC as recently as the first half of 2009. (S&P defines CCC as “currently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments.” It’s sure not investment grade.)
Why is this so important to MGM Resorts? Thanks to a badly timed (and priced) acquisition and big expansion plans in Las Vegas, the company barely skirted bankruptcy in 2009 and 2010. It came out of those deals with 30% of all the rooms on the Las Vegas Strip but with a huge burden of $13.5 billion in long-term debt at the end of 2011.
As you might imagine every basis point counts when you’re carrying that much debt. (Every one-percentage point reduction in MGM’s debt costs means an extra $125 million in cash flow to the company.) So the new bond issue at 7.75% is a big deal. For comparison, MGM sold $845 million in senior secured debt in March 2010 at a 9% yield. The company calculates that every one percentage point reduction in its current average 8% interest rate will add $125 million to cash flow.
When you carry that much debt, getting creditors to extend the maturity of their bond holdings is critical. Part of the proceeds from the current offering for example, will be used to pay off creditors that wouldn’t agree to extend the term of their loans. That means that MGM has now pushed all its debt maturities to 2013 or later.
Which gives the company the time it needs to let the recovery in the Las Vegas market work its magic. In the fourth quarter of 2011 MGM’s revenue from its properties on the Las Vegas Strip climbed 8.3%--after revenue growth of 4% in the third quarter. RPAR, the all-important revenue per available room metric, was up 13%.
Morningstar estimates that gaming revenue on the Strip climbed 5% in 2011 and will increase by another 5% in 2012. (That’s a huge turnaround from the 19% decline in gaming revenue from 2007 to 2009).
But it’s the turnaround in the Las Vegas convention business that’s the real big news for MGM Resorts. Convention business in Las Vegas is projected to climb 10% next year. MGM’s margins of 70% on its hotel business are much higher than on its gaming revenue.
The upturn in Vegas comes just as MGM looks likely to loose some market share in Macau’s Cotai Strip to a new resort from Sands China. MGM China revenue was up 26.1% in the fourth quarter of 2011. For 2012, I’d look for about half that growth from Macau as the overall market slows and as MGM gets new competition.
At $14.22 at 3 p.m. New York time on March 19, these shares have a little less value than I’d like. I’d look for an entry point more like the $13.08 price the stock hit after a short correction on March 6.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of Sands China as of the end of December. For a full list of the stocks in the fund as of the end of December see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/
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