What Is MGM Resorts Worth?

MGM Resorts (NYSE: MGM  ) has taken the wrath of my articles for over a year now. The U.S.-based gaming company has been on my list of worst investments in gaming, a short sale in my own portfolio, and a company whose decisions I constantly question.

So today the question is: What is MGM Resorts really worth?

MGM's crown jewel
First, let's try to value the company's most valuable asset -- its 51% stake in MGM China. The company has one casino, and the prospect of building another one on the Cotai Strip in five years or so. In the past year, MGM China has generated $226.2 million of operating income for MGM.

I usually like to use enterprise value/EBITDA but since operating income, not EBITDA, was reported for most of the last year we'll use that instead. If we use an enterprise value/OI multiple of 15 times to 18 times -- more generous than EV/EBITDA multiples of competitors -- that would give me an enterprise value of $3.39 billion to $4.07 billion. Now we back out the $174 million in net debt at MGM China, which gives me an equity stake of $3.22 billion to $3.90 billion for MGM.

Closer to home
What scares me most about MGM Resorts is the company's huge exposure to the U.S. gaming market. Even though the numbers have gotten better recently, I would still qualify them only as "less bad" rather than good.

MGM owns a number of its own casinos, but its biggest, CityCenter, is a joint venture with Dubai World. So let's break down what MGM's wholly owned resorts and CityCenter are worth separately. Multiples for these properties are lower than I used above because growth is anemic in the U.S. compared to Macau.

 

Trailing 12-Month Property EBITDA

Enterprise Value Multiple

Net Debt

Equity Value

Wholly Owned $1.21 Billion 5 times to 8 times $11.73 billion ($5.68 Billion) to ($2.05 Billion)
CityCenter $119.4 Million 6 times to 9 times $2.56 billion ($1.84 Billion) to ($953 Million)

Source: Company filings.

MGM's stake in CityCenter is only 50%, but as you can see, I would make the argument that neither the company's wholly owned resorts nor CityCenter are worth anything to MGM shareholders.

You could make the argument that CityCenter's EBITDA hasn't yet reached full capacity, you could say that Las Vegas is starting a comeback, or you could look at these numbers and wonder how in the world MGM's stock is worth anything?

Wild card
The one advantage MGM has over Wynn Resorts (Nasdaq: WYNN  ) , Las Vegas Sands (NYSE: LVS  ) , and Melco Crown (Nasdaq: MPEL  ) is its large base of casinos, which could attract players if demand returns in the U.S. (like if an online poker bill were passed). That could be worth hundreds of millions of dollars to MGM, but right now it's only a dream.

Foolish bottom line
Before jumping into MGM's stock, ask yourself if you really think the company is worth more than the debt on the balance sheet. MGM China may be worth billions, but the company's U.S. operations have a long way to go before they're worth anything to shareholders. This doesn't mean MGM will be bankrupt anytime soon, since debt maturities are too far out for that. But that still doesn't make the stock a buy.

Interested in reading more about gaming stocks? Add all of them to My Watchlist, and My Watchlist will find all of our Foolish analysis on these stocks.

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 08, 2011, at 10:41 PM, Magicula wrote:

    MGM doesn't have the prospect of building a casino on the "Cotai Strip," because the term "Cotai Strip" is a trademark of Las Vegas Sands Corporation and only refers to its properties. So it is only correct to say that MGM may build a casino in Cotai.

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