Is MGM the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if MGM Resorts (NYSE: MGM  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at MGM.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 3.6% fail
  1-Year Revenue Growth > 12% (6.6%) fail
Margins Gross Margin > 35% 38.7% pass
  Net Margin > 15% (36.2%) fail
Balance Sheet Debt to Equity < 50% 457.9% fail
  Current Ratio > 1.3 1.50 pass
Opportunities Return on Equity > 15% (54.8%) fail
Valuation Normalized P/E < 20 NM fail
Dividends Current Yield > 2% 0% fail
  5-Year Dividend Growth > 10% 0% fail
       
  Total Score   2 out of 10

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; MGM had negative earnings during the period. Total score = number of passes.

With a score of 2, MGM clearly isn't perfect. But even when you discount for the fact that the entire casino industry has suffered tough times lately, MGM has some specific shortcomings that should give you pause.

For one thing, MGM is in a weaker position than its main competitors, Las Vegas Sands (NYSE: LVS  ) and Wynn Resorts (Nasdaq: WYNN  ) . Both Las Vegas Sands and Wynn have seen much faster growth and have started paying down some of their extensive debt loads, while MGM remains mired in its debt. MGM also isn't as well placed in the fast-growing Macau market as Melco Crown Entertainment (Nasdaq: MPEL  ) .

To address its debt problem, MGM is trying to take advantage of a higher stock price to raise capital. But with founder and major shareholder Kirk Kerkorian allowing his stake in the casino to be diluted by a share offering, he's signaling a potential loss of confidence. Even if more capital helps in the short run, it could bode ill for MGM's long-term prospects.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Want to own the perfect stock? Click here to read our special report, 5 Stocks the Motley Fool Owns -- And You Should Too.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Melco Crown Entertainment is a Motley Fool Global Gains recommendation. Try any of our Foolish newsletters today, free for 30 days. The Fool has a disclosure policy.


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