Value stocks are shares in companies trading for relatively low prices relative to earnings and growth potential. While investors shouldn't expect multibagger returns, these companies are ideal for those who prefer a slow and steady approach to long-term investing.
With a low valuation and consistent profits, MGM Resorts (MGM 4.26%) fits the bill. Let's explore why it could have a place in your investment portfolio.
Why MGM Resorts?
Anyone who has been to Las Vegas should be familiar with MGM Resorts. The casino operator is known for its iconic properties like the Bellagio, Mandalay Bay, and its namesake, the MGM Grand. The company also has a footprint in America's regional casino markets and the Chinese market via that nation's famed gaming hub, Macau.
Like many in-person entertainment companies, MGM was hit hard by the pandemic at the start of the decade. However, it managed to navigate this challenging time without destroying its balance sheet because of the well-timed $4.25 billion leaseback sale of the Bellagio in 2019.
Leaseback sales involve selling a casino's real estate assets to a third party in return for cash while renting it back to use for operations. The Bellagio deal gave MGM the extra cash it needed to deal with the pandemic without over-relying on debt financing or selling new stock. In 2021, management completed an additional $3.89 billion leaseback sale of its Aria and Vdara properties to free up more capital to pursue new growth opportunities.
These moves highlight MGM's transition to a more nimble, asset-light business model and its commitment to source capital without potentially shareholder-unfriendly tactics like debt issuance or equity dilution, which can reduce investors' claims on future earnings.
Slow and steady wins the race
MGM Resorts is a mature blue chip company, so investors shouldn't expect breakneck growth. That said, its recent performance looks encouraging. Net revenue increased by 13% year over year to $4.4 billion, mainly because of the strength in MGM China, which is still recovering from the impacts of COVID-19 restrictions in Macau. Over the next five years, the company will enjoy some potentially transformational growth drivers.
Image source: Getty Images.
MGM is partnering with the financial services company Orix Corporation to build a new $10 billion integrated resort in Osaka, Japan. Despite being a large, wealthy economy, Japan's gambling industry is virtually untapped, as most casino games were banned until 2018. Industry watchers believe the Osaka resort could generate a whopping $3.9 billion in annual revenue when fully operational in the mid-2030s.
To put these numbers in context, MGM generated sales of around $16.2 billion in the full year of 2023. So, the Japanese resort could represent a substantial boost to its top-line growth over the long term while providing much-needed diversification outside of the U.S. and China.
Returning value to investors
With a solid and steadily growing top line, MGM Resort is an attractive investment. But its rock-bottom valuation is icing on the cake. The stock trades at a forward price-to-earnings (P/E) multiple of just 19, which is significantly lower than the S&P 500 average of 27.
And while the company doesn't pay a dividend, management returns value to investors via a generous buyback program that has reduced shares outstanding by a whopping 36% since 2021. Investors generally like buybacks because they can increase investors' claims on future earnings and cash flow by reducing the number of shares outstanding.
