The turnaround story at MGM Resorts (NYSE: MGM ) was supposed to be going a little more quickly than this. After the recession pounded the company's results in Las Vegas, a move into the Macau market was supposed to drive the company's stock from the depths as it has for Las Vegas Sands (NYSE: LVS ) and Wynn Resorts (Nasdaq: WYNN ) . But a disappointing quarterly report last week didn't give investors a lot of confidence that the red ink will stop flowing soon.
In the first quarter, the net loss grew to $203.3 million from $89.9 million a year ago as the company incurred some one-time charges and costs grew faster than expected.
MGM China was the rock star, which shouldn't surprise anyone. Revenue was up 18% to $702 million and EBITDA grew 21%, excluding branding fees, to $165 million. That's about in line with Las Vegas Sands' property EBITDA growth in Macau, so the resort seems to be performing on par with peers.
But as solid as MGM China is, CityCenter is just the opposite. The most ill-timed development in gaming generated just $32 million in EBITDA and resulted in a $18.6 million loss from operations for MGM. This comes after writing down most of the CityCenter assets over the last few years.
Debt looms heavy
My biggest problem with the two big players in Las Vegas, MGM Resorts and Caesars Entertainment (Nasdaq: CZR ) , is that they both have way too much debt on their balance sheets. MGM has the advantage of a cash flow from Macau, but it didn't help the company deleverage in the first quarter. In fact, net debt was up from $11.8 billion to $12.0 billion in the quarter. The balance sheet still worries me, and although operations are getting better I don't have confidence they're improving fast enough to help the stock short-term.
Missing out on Cotai
The hottest spot in gaming right now is Cotai, where Las Vegas Sands currently rules and Melco Crown (Nasdaq: MPEL ) generates most of its value. Wynn recently got the go-ahead to build another casino there. MGM has a proposal to build there as well, but the longer it's delayed, the more the company falls behind. This is the one growth driver that could change the narrative on MGM altogether.
To buy or not to buy?
There are a lot of numbers to consider above, but the investment case comes down to just one question: Is MGM Resorts growing fast enough to overcome its debt burden?
I just can't see a great argument that it is, considering how slowly the economy is recovering. Results are showing an improvement, there's no doubt about that, but it's just not moving very quickly and even analysts are expecting losses to continue through 2013. There are better buys in gaming and certainly less risky bets at this point in the game.
MGM may not be a great buy right now, but our analysts have identified a stock they like so much they've called it the top stock of 2012. It's highlighted in a report you can find here, and the best thing is that the report is free.