Has MGM Resorts Become the Perfect Stock?

Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if MGM Resorts (NYSE: MGM  ) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • 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 mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. 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 Resorts.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

3.2%

Fail

 

1-Year Revenue Growth > 12%

50.8%

Pass

Margins

Gross Margin > 35%

36.6%

Pass

 

Net Margin > 15%

(6.8%)

Fail

Balance Sheet

Debt to Equity < 50%

142%

Fail

 

Current Ratio > 1.3

1.39

Pass

Opportunities

Return on Equity > 15%

(4.1%)

Fail

Valuation

Normalized P/E < 20

NM

NM

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

       
 

Total Score

 

3 out of 9

Source: S&P Capital IQ. NM = not meaningful due to negative earnings. Total score = number of passes.

Since we looked at MGM Resorts last year, the company has held onto the third point that it gained between 2010 and 2011. The shares haven't done anything terribly special, with the stock rising about 10% in the past year.

After benefiting greatly from rapid expansion in Las Vegas over the decades, MGM Resorts has arguably fallen out of the top tier of casino stocks. With huge growth in Asia, Wynn Resorts (Nasdaq: WYNN  ) , Las Vegas Sands (NYSE: LVS  ) , and even local favorite Melco Crown (Nasdaq: MPEL  ) have surpassed it in terms of market cap. MGM has a presence in the Asian gaming capital of Macau, but it isn't as big there as some of its competitors.

MGM has also had to navigate changing trends domestically. After years of painful retrenching, Las Vegas seems to be coming back as a revenue generator. But the biggest growth area in Vegas is the food and beverage industry, with gaming taking a back seat as the city has become a magnet for high-dollar foodies and night-clubbers. With MGM and Caesars Entertainment (Nasdaq: CZR  ) both stuck under mountains of debt, it'll be tough to restore balance sheets to health without the profits that gaming offers.

But MGM isn't giving up. It's looking to build a second casino in Macau. Given the slowdown in neighboring China's economy, the timing may be bad, but if a rebound comes, MGM could get itself a bigger piece of the Asian gaming pie.

MGM faces a long road ahead to try to improve itself. It needs to make the most of the renaissance in Las Vegas while still maximizing gaming-related income. If it can turn its bottom line around, it'll be an important first step for MGM to move closer to perfection.

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.

MGM Resorts has its issues, but Las Vegas Sands has been an innovator in the international expansion of the gaming industry. Find out all about the company's next big moves in the Fool's premium research report on Las Vegas Sands. The stock may not be a sure thing, but there's one bet you can feel comfortable making: knowing more about the company will make you a smarter investor. Click here to get your report today.

Click here to add MGM Resorts to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. 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 Fool has a disclosure policy.


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