I haven't been a fan of MGM Resorts (NYSE: MGM ) for more than a year now, mainly because of a series of errors the company made nearly a decade ago. It built too big in Las Vegas, made a bet on building condos at the peak of the market, and was a late entrant into Macau.
Add all of this up and you have the worst investment of the major casino operators. Here are the three biggest reasons to be short MGM Resorts right now.
Las Vegas is the new Atlantic City
If you're betting on a recovery in Las Vegas, you might have to wait a while. It could be years until Vegas reaches the gaming levels it once enjoyed, and it will be even longer before the area can fully support a glut of new supply.
After peaking at $6.8 billion in gaming wins in 2007, the Las Vegas Strip has been on a dramatic slide ever since. Gaming wins fell 10.6% in 2008 and 9.4% in 2009 and recovered by only 4.1% in 2010. In 2011 the numbers have been choppy, but in August, gaming wins fell 8.7%, a sign that the recovery is anything but solid. And the drop happened just as CityCenter and Cosmopolitan were adding thousands of rooms and lots of gaming tables to supply.
Room rates and other non-gaming revenue have started to recover, but CityCenter is barely making positive EBITDA and not coming close to paying for its massive $9.2 billion price tag.
The crushing power of debt
If the prospects in Las Vegas aren't bad enough, take a long look at MGM's balance sheet. At the end of last quarter, long-term debt stood at $12.6 billion, most of which was outside of Macau (and which is now consolidated).
Trying to pay that debt from only $6.3 billion in revenue in the most recent four quarters doesn't leave a lot of room for error. And considering that Macau is MGM's only growth market, the debt load may crush the company.
Opportunities to grow are limited
Still don't believe me? You might say, "But the company has a fast-growing casino in Macau," or "Debt maturities aren't for years."
Those statements are true, but unlike Las Vegas Sands (NYSE: LVS ) , Wynn Resorts (Nasdaq: WYNN ) , and Melco Crown (Nasdaq: MPEL ) , MGM owns just 51% of its casino in Macau, and the debt will still come due, even if it won't be for a while.
MGM will probably announce another resort development on Cotai sometime in the near future, but it will be four years or more before the development is complete. Other growth opportunities in places such as Singapore, Japan, and Vietnam would require casinos on a scale that MGM just can't afford.
There's also the slight possibility that online poker is legalized in the U.S., which would be a huge boon for MGM -- but those of us who play online have been waiting on that for years.
I'll back up my pick by putting my 95 CAPS rating on the line and giving MGM Resorts a red thumb in My CAPS.
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