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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
|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?
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.
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