Is MGM a Good Bet for the Las Vegas Comeback?


MGM has locations around the US, especially in Las Vegas, which had once been world renowned before everyone focused on Macau
where MGM is not as strong. Could that change soon? Photo: MGM Resorts

It used to be all glitter and glam for Las Vegas and Nevada's residents. Then, following the financial crisis of 2008, everything seemed to change. If Caesars Entertainment (NASDAQ: CZR  ) is a bet on US operations, and Las Vegas Sands (NYSE: LVS  ) is a bet on growing Asian dominance, MGM Resorts International (NYSE: MGM  ) falls nicely in the middle with 37% of its revenue coming from Macau and nearly 50% still coming from Las Vegas, where its properties are ready for revenue to start flowing in like it did five to ten years ago.

Caesar CEO Gary Loveman regretted his missed Asian expansion and has tried to fix it since then. Photo: Review Journal

MGM vs. Caesars
After first-quarter earnings, Caesars Entertainment does not look so good. With casino revenue down over 8% and total income down an astonishing 50% in comparison with the first quarter of 2013, it seems to be a losing bet for investors. With no significant international holdings after failed attempts in Macau and South Korea, the company's huge income decline provides evidence that it did not make the bet that it should have on Asia, with a lack of profit from just the US alone.

In contrast, MGM Resorts reported a net revenue increase of 12% year-over-year as well as EBITDA Growth of 19% for the first quarter. For investors who look to play possible regrowth in the US market, Caesars doesn't hold much hope as a strong investment candidate, and MGM looks much better here.

MGM Resorts vs. Las Vegas Sands
What about Asian operations, where MGM still gets 37% of its global revenue? Las Vegas Sands easily bested MGM with first-quarter 2014 revenue of a record $4.01 billion, up over 21% year-over-year. MGM Resorts came in at a not-so-close second as it also posted solid results from its China operations, though it posted revenue growth of barely more than half of that of Las Vegas Sands.

 
 

MGM Resorts

Las Vegas Sands

Q1 Net Revenue Growth YoY

12%

21.4%

Q1 Net Revenue Growth YoY

TBA

12%

Share Price in April

$24.33

$76

Share Price in July

$25.5

$73.8

P/E (TTM)

249.8

24.1

P/E est. 2015

38.7

16.7

Source: Yahoo! Finance

A key reason why Las Vegas Sands has been able to crush this quarter is through revenue growth in Asia, not only from Macau, but also from the company's operations in Singapore. Because Sands is a front-runner in the bidding to win a casino in Japan, this trend seems like it will only grow.

Source: Corporate Website

MGM Resorts grew faster than the industry in Las Vegas in 2013 and the trend is likely to continue this year. Higher room rates and cost efficiencies have led to incremental margins of more than 60% for MGM in Las Vegas. While Las Vegas Sands continues to focus on Macau and Asia, MGM has kept its bets there more conservative. Las Vegas Sands reported lower-than-expected EPS of $0.85 while the analyst estimate had called for $0.90 in EPS and this has been attributed to slowed growth in Macau. While I am personally still very bullish on Las Vegas Sands and Macau, investing in the coming Las Vegas recovery may be better suited for a company invested in the area such as MGM Resorts.MGM is the bet between Asia and the Las Vegas come back
Here is the Las Vegas comeback that could put MGM on top. In 2012, the Las Vegas gaming market as a whole still saw EBITDA down 30% from the peak five years prior, though its net revenue climbed to a point just shy of that peak year in 2007.


The MGM Mirage, one of the most notable of MGM's resorts, is still one of the most magnificent in the world. Photo: MGM

Foolish takeaway
Macau's gaming industry is still growing at an incredible rate and that growth has helped to spur on MGM Resorts during the first quarter. However, it is clear that investors who want to bet on Macau are better off with Las Vegas Sands, as it has posted even more incredible numbers despite missing expectations on its second-quarter earnings. 

Las Vegas was once the place to be in the gaming world, and for some it still is. For investors who want to bet on the return of Las Vegas gaming revenue, they may be lured by Caesars Entertainment as a cheap play now. However, Caesars has also posted quarter after quarter of losses as it just can't seem to recover from the decline in the US gaming market and failed attempts to obtain international properties. Without a better plan for driving growth going forward, Caesar's still looks like a risky bet.

Thus, for investors who are looking for the middle ground and want to get some profit from Macau with exposure to possible growth in US revenue over the next few years, MGM Resorts looks like a great bet right now. Stay tuned for MGM's second quarter results during the first week of August.

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  • Report this Comment On July 25, 2014, at 3:41 PM, JF125780 wrote:

    An excellent article Bradley, I've always liked MGM.

    MGM is my favorite hotel on the strip.

    Danny Kowkabany

  • Report this Comment On July 25, 2014, at 3:54 PM, DoubleDownNow wrote:

    Vegas is back and MGM is the way to play it with the most exposure to The Strip!

  • Report this Comment On July 26, 2014, at 2:34 PM, 10HighSigns wrote:

    The main problem for MGM is that the 1st Qtr of the year is their best, and we can see from the Sands release that room rates were down $20 each from the first quarter in Las Vegas. Which

    means, MGM certainly won't approach the earnings it had in Q1 and may be marginable this time................

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