MGM Update: Enough Upside Ahead
05/01/2014 4:45 am EST
Even though this international hotel and casino company beat Wall Street projections on earnings, is there enough upside ahead for MoneyShow's Jim Jubak to raise his target price? Yes.
On April 29, MGM Resorts International (MGM) beat Wall Street projections on earnings by 12 cents a share and on revenue by $80 million. Revenue climbed by 11.8% year over year.
As has been true recently, the company’s Macao operations were the star with MGM China showing a 26% year over year increase in net revenue. MGM China’s adjusted net EBITDA (earnings before interest, taxes, depreciation, and amortization) increased by 33% year over year.
But the results for the company’s Las Vegas operations were stronger than they’ve been in recent quarters with REVPAR (revenue per available room) at the Las Vegas Strip properties up 14% year over year.
The question for me, though, is, now that MGM Resorts has hit my $24 target price in my Jubak’s Picks Portfolio, is there enough upside for me to raise my target price and continue to hold these shares? The stock climbed, after all, 9.6% the two days after that April 29 earnings report.
I think the answer is, “Yes.” As of May 1, I’m raising my target price for MGM Resorts International to $31 a share by December 2014.
Let me tell you where I think the growth will come from.
First, despite the clear recovery in Las Vegas, there’s still room for improvement. Some MGM properties are operating 30% off their peak. (In addition, the MGM National Harbor casino in Maryland received a license in December. The casino, just across the District of Columbia line, would be Maryland’s sixth).
Second, MGM Resorts will get more credit for its second Macao casino as the Cotai operation moves closer to its scheduled opening in early 2016.
Third, Japan looks like it’s on the verge of legislation that would legalize casino operations in Tokyo—the selection of Tokyo as the sight of the 2020 Olympics is providing a powerful catalyst—and in Osaka—Japan’s second largest city is making it clear that it will not be left behind and may even beat Tokyo in laying the required legal foundation. MGM Resorts (along with competitors such as Las Vegas Sands (LVS) has made it clear that it will put $5 billion to $10 billion to work in Japan as soon as it is able.
With the company in deep investment mode in Macao and still recovering from what was a near-death experience in the Las Vegas market, these shares look expensive on a PE basis. They are trading at 63 times forecast 2014 earnings per share. The price to sales ratio, however, which reflects the revenue recovery that will, I project, precede a continuing and accelerating recovery in earnings, is a much more reasonable 1.23. As long as the company continues to make good progress on converting those revenues to earnings—and MGM Resorts reported operating margins of 15.7% for the first quarter of 2014, up from 12.8% in the first quarter of 2013—I’m okay using price to sales as my valuation benchmark.
Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. When in 2010 I started the mutual fund I manage, Jubak Global Equity Fund, I liquidated all my individual stock holdings and put the money into the fund. The fund did not own shares of MGM Resorts International as of the end of March. In preparation for closing the fund at the end of May, as of the end of March I had moved the fund’s holdings almost totally to cash.