How MGM Resorts Could Outperform Other Gaming Stocks

Leverage is a fickly thing. Leverage can goose your results in good times or come with disastrous consequences in bad times. It's what nearly brought Las Vegas Sands (NYSE: LVS  ) , Caesars Entertainment (NASDAQ: CZR  ) , and MGM Resorts (NYSE: MGM  ) all to their knees during the financial crisis.

Some of that leverage still remains in gaming stocks, and it's a reason why MGM may outperform rivals over the next few years. Or, at the very least, it could keep up with faster-growing rivals.

Upside in Las Vegas
I was in Las Vegas a few weeks ago and the mood has changed. It's not the gaga days of the mid-2000s, when everyone was making money hand over fist. It's returned to a normal state after the financial crisis. The scars still remain at abandoned construction sites on the north end of The Strip and at the abandoned tower between The Venetian and Palazzo, but I would say that Las Vegas is back.

If Las Vegas returns to a normal level of growth, somewhere in the mid-single digits, it could be a boon for investors of MGM Resorts and Caesars Entertainment simply because of leverage.

Modeling leverage in gaming
But what is the upside for MGM or Caesars just based on leverage? Below, I've tried to model what the upside for investors could be.

I have listed the current market cap, net debt, enterprise value, and enterprise value/EBITDA ratio for the four largest U.S.-traded gaming companies. Caesars is by far the most leveraged, but MGM isn't far behind and has exposure to more growth markets.

 

Market Cap

Net Debt

Enterprise Value

EBITDA

EV/EBITDA

MGM Resorts

$6.32 Billion

$11.63 Billion

$17.95 Billion

$1.68 Billion

10.7

Las Vegas Sands

$43.58 Billion

$8.01 Billion

$51.59 Billion

$4.55 Billion

11.3

Wynn Resorts

$12.31 Billion

$3.89 Billion

$16.20 Billion

$1.58 Billion

10.2

Caesars Entertainment

$972 Million

$18.79 Billion

$19.76 Billion

$2.02 Billion

9.8

Melco Crown

$11.18 Billion

$996 Million

$12.18 Billion

$904 Million

13.5

Source: Yahoo! Finance and company filings. Note: Enterprise value and EV/EBITDA are author's own calculations.

These five companies have very different exposure to the U.S., Macau, and Singapore and different growth potential, but if we project five years of growth, I can demonstrate why I think MGM could outperform some rivals, even if these rivals grow more quickly.

Below I've laid out different five-year EBITDA total growth rates for these five companies based on potential gains. For example, Las Vegas Sands and Melco Crown (NASDAQ: MPEL  ) will likely grow more than MGM and Caesars because of exposure to Macau and new casinos in Asia. Wynn Resorts (NASDAQ: WYNN  ) could grow more than those two because I've projected that its new Cotai casino could double the company's revenue and EBITDA. Caesars will most likely lag the other four.

(The rates I've estimated could be debated and so could the EV/EBITDA ratios, but I've provided all of the numbers so you can adjust the calculations as you see fit.)

I've calculated how the equity value would grow if the scenario below played out.

 

5-Year EBITDA Growth

EV/EBITDA

Stock Growth

MGM Resorts

50%

8.5

+54%

Las Vegas Sands

60%

9.0

+32.1%

Wynn Resorts

70%

9.0

+65%

Caesars Entertainment

30%

8.0

+127.3%

Melco Crown

60%

9.0

+7.6%

I'll get to why Caesars is so high in a moment, but it's important to point out that both EV/EBITDA multiples and EBITDA growth play big roles in this calculation. Right now, Melco Crown is trading at an extremely high multiple of 13.5 and Las Vegas Sands is elevated at 11.3. Even MGM's current multiple of 10.7 takes away from potential upside if the scenario above played out.

What I've shown is that MGM could outperform some of its higher growth rivals even without a premium price just because of the leverage on its balance sheet.

Why not Caesars?
Caesars has more leverage than MGM and is, therefore, far more risky. If I adjust the growth rate in the table above to 20% total over the next five years and use the same EBITDA multiple, the stock would drop 39%. That's a huge swing and too much risk for me to handle right now.

What to do now
If you're looking at gaming stocks, I would stick with higher quality than Caesars and a better value than Melco Crown right now. Among MGM, Las Vegas Sands, and Wynn, it depends on where you think Las Vegas is headed and how you think Macau will grow. Wynn has the safest balance sheet and upside on Cotai in a few years. Las Vegas Sands is the dominant player in Macau and has exposure to Singapore, which could be huge upside if the area's gaming recovers. Finally, MGM has the most exposure to Las Vegas. So if the U.S. economy booms in the next few years, the stock could rise quickly if Strip gaming revenue grows near double digits.

My top pick is Wynn Resorts given its value versus peers and growth potential, but MGM could easily outperform if Las Vegas picks up.

When MGM Resorts began constructing the CityCenter in Las Vegas, it was an audacious plan that seemed like a sure bet with its prime location in the center of The Strip. But Las Vegas hit a rough patch during the Great Recession and has yet to fully recover, so MGM has since turned its attention to a new market in Macau. This Chinese gaming enclave now holds the key to the company's future, and a new resort on Cotai may relieve the company from crushing debt. For expert analysis on whether this former high-flying stock can regain its form on the back of a growing presence in Asia, you're invited to check out The Motley Fool's new premium report on MGM Resorts. As an added bonus, you'll receive a full year of key updates and guidance as news develops, so don't miss out -- simply click here now to claim your copy today.


Read/Post Comments (2) | Recommend This Article (1)

Comments from our Foolish Readers

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 January 23, 2013, at 10:05 PM, cp757 wrote:

    Here we go again. Travis won't mention Las Vegas Sands may sell Sands Bethlehem for one Billion dollars. Who knows if CZR, MGM, or Wynn could afford to buy it but it does make money.

    Travis would never mention the 10,000 rooms in Macau that Las Vegas Sands has . Las Vegas Sands will get 400 new tables in Macau that will each make $8,700 a day. That's 400 times $8,700 times 365 days in added revenue. Travis would never tell anyone about that. WYNN is going to open on the Cotai strip in 2017 so he says that is the place to invest.

    MGM had to pull out of Atlantic City because Pansy Ho owned part of MGM and the Gaming Board said they had to take her out or leave Atlantic City.

    Travis would never tell you that WYNN's Market Share in Macau went down all year in 2012. WYNN will continue to lose market share because the traffic has migrated to the Cotai Strip and has the highest amount of traffic and total gross over the peninsula which is the only place WYNN has a casino until 2017. I am so glad investors know how bad Motley Fool is. Travis you crack me up.

  • Report this Comment On January 24, 2013, at 10:47 AM, mbablitz wrote:

    Travis,

    I would suggest a new title for your article, "How I use skewed metrics to make my WYNN stock pick look better because I missed the LVS boat."

    I remember the days when Fool analysts were saying LVS' debt load was bad; China will have a hard landing; and nobody will gamble in Singapore. Now, somehow when you need that debt metric to make your stock pick appear better than LVS going forward, suddenly debt is a good thing. The difference now is, LVS used that debt to gain an advantage in Macau and Singapore that can't be duplicated by the other companies you mentioned. Their debt only allows them to feed on the table scraps and leftovers. LVS has all the prime locations on the Cotai Strip. Those prime locations feed customers to their malls, restaurants, entertainment, conventions and rooms. It's a synergy nobody else has.

    You mention you are looking 3 to 5 years out, so there is something else to consider: Those malls will also be sold at some point ringing the register for somewhere in the neighborhood of $4B each. Also, for at least the next 3 years no other gaming companies will open a new casino in Macau. During that time period, the casino operators you favor will be increasing their debt load building in Macau to play catch-up. While those companies are increasing their debt, LVS will be gaining market share and paying down debt. This will result in increasing free cash flow that will be returned to shareholders via increased dividends. This reduced debt and increased free cash flow will also allow LVS to pounce on new opportunities in Japan, SKorea, Taiwan and Spain.

    There's a metric for that but it's harder to measure and it's called opportunity cost. That's an unknown now because nobody gambles much in those places... right now.

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