5 Things MGM Resorts' Management Wants You to Know

"Our key markets are continuing to grow, and we continue to invest and focus where we see opportunity."

These words were spoken by MGM Resorts International (MGM 0.90%) CEO James Murren in the conference call following the company's second-quarter earnings release on Aug. 5. MGM beat analyst earnings-per-share estimates of $0.12 a share by 75%, reporting $0.21 per share. This came from revenue of $2.6 billion, up 4% over the same quarter last year. Even though the company had a smaller growth rate than competitors Las Vegas Sands and Wynn Resorts, investors are excited about MGM Resorts now. Here are some quotes from the conference call indicating what management wants investors to know now, and a look at if this stock is really worth the excitement.

The Las Vegas comeback

"We're very pleased with the progress we continue to see in our home market here in Las Vegas."
-- MGM Resorts CEO James Murren

Revenue from MGM Resorts' U.S. wholly owned resorts led its growth in the most recent quarter, up 6% over Q2 last year, with EBITDA at domestic properties up 10% over the same time. This is part of what many analysts are calling "the Las Vegas comeback."

Many analysts are predicting that Las Vegas could be on its way back after struggling since the Great Recession. Two years ago, marketwide EBITDA in Las Vegas was still down 30% from its 2007 peak, even though net revenue was just shy of its peak five years prior. Those earnings in Vegas have climbed up slowly in 2013 and the first half of 2014, and MGM Resorts is one company betting on this continued trend. MGM grew its revenue faster than the industry in Las Vegas in 2013. Higher room rates and cost efficiencies have led to incremental margins of more than 60% for the company's Las Vegas properties. Murren made this hiring announcement early on in the earnings call:

Ultimately, that's the business that we're in of creating unique experiences for our customers. And with that in mind, I'm pleased to announce the hiring of Lilian Tomovich ... responsible for developing and executing guest interactions across all marketing channels with a goal of improving the guest experience company wide. We're very excited for this.

This announcement that the company is continuing to push a better and better guest experience, hopefully pushing up those room rates in Las Vegas even higher, is exciting. Because the company is so focused on making its guest experience the best it can be, its operations in Las Vegas should be able to continue winning on nongaming revenue growth.

Image source: MGM Resorts

Then why is MGM still lagging the competition?

After Las Vegas Sands' second-quarter earnings release disappointed investors -- its earnings per share came in at $0.85, below analyst expectations of $0.90, following a drop in growth in Macau gaming -- investors might think that MGM's big win this quarter positions it ahead of Las Vegas Sands for profit growth. Let's look further.

MGM Resorts gets only a third of its global profit from Macau, versus more than two-thirds for Wynn Resorts and Las Vegas Sands. Therefore, volatility in Macau during one quarter will result in less harm to MGM's global performance. Wynn Resorts and Las Vegas Sands felt the Macau squeeze this quarter, especially Wynn, which has relied more heavily on VIP revenue, a segment hit hard in Macau this summer. But while that put earnings for these companies below expectations, they are still above that of MGM Resorts.

Overall, MGM is still lagging behind these two major competitors on a global scale in both total revenue and revenue growth, even with the boost MGM got from Las Vegas. While the $2.6 billion in revenue and 4% increase year over year is great for MGM, it's well below the 12% year-over-year increase posted by Las Vegas Sands and 6% posted by Wynn for the same time frame. Las Vegas Sands especially posted a solid second quarter with a net income increase of 27% year over year.

Source: Yahoo! Finance.

The reason that MGM Resorts, even with its boost from Las Vegas, is still lagging behind competitors in revenue growth is that Asia is still driving vastly more growth than Las Vegas in the global gaming industry. MGM understands this, and the company is still trying to claim its piece of the Asia pie in both Macau and Japan. But its prospects are not nearly as good.

MGM Macau. Photo: MGM Resorts.

Still betting on Asia

Macau is still the largest and fastest-growing gaming market in the world by far. Because of that, each major casino company is getting ready to unveil a new casino resort on the Cotai Strip there in the next one to two years.

"MGM Cotai will greatly expand our operations in Macau, as the property will have nearly quadruple our room base and triple our growth floor area, which will allow us to expand our reach into the retail and entertainment. These will all create opportunities for earnings and margin improvement."
-- MGM President, Grant Bowie

MGM management spent a lot of the Q2 conference call discussing their excitement over their coming resort in Macau. They noted that the resort will vastly add to their footprint and room count in Macau. MGM got the green light last year from the Macau government to continue its planned development of a new resort on the Cotai strip. The resort will include 1,600 new guest rooms and expand the company's Macau presence to both sides of the Macau island.

The current construction site of the Parisian. Photo: Bradley Seth McNew

MGM Cotai will definitely be a major advancement for MGM Resorts and its investors. However, this resort, which will already be opening a year later than Las Vegas Sands' new resort next door, may be delayed even longer, according to MacauBusiness.com. In the conference call, Murren acknowledged that obtaining certain permits was becoming problematic, and that they are still planning for a 2016 opening but not pinning down a date yet.

A rendering of what the Parisian Macao will look like. Source: Las Vegas Sands.

However, Las Vegas Sands' coming Parisian Macau is in full development, still planned to open in 2015. The $2.7 billion integrated resort will include over 3,000 hotel rooms and suites, around 450 table games, 2,500 slots, a retail mall, and a replica of the Eiffel Tower at 50% scale. While MGM Cotai will definitely help to increase MGM Resorts' Macau revenue, as of right now, it pales in comparison to the excitement investors should be feeling over Las Vegas Sands' coming resort.

Finally, getting ready for Japan

Another way the company hopes to expand its footprint in Asia is with a new resort in Japan, if that country legalizes casino gambling. The casino industry in Japan could be worth as much as $40 billion in a few years, according to analyst estimates, making it the second-highest revenue-earning gaming hub in the world behind Macau. For that to happen, though, the Japanese government needs to legalize casino gaming. With the bill for legalization already in discussion, and the vote to pass it scheduled for this fall, MGM is already making its investment in Japan.

"I have to say that we've been spending quite a bit of time in Japan, and we remain quite optimistic for legislation this fall."

These words from Murren during the Q2 conference call show that MGM Resorts is certainly fighting for a spot in this market, with a planned bid for the southern city of Osaka. The company has reported that it already has a full team and offices set up in Japan, and feels that it has a winning chance at a casino bid there due to its strong recognized brand and willingness to effectively partner with local stakeholders.

However, once again Las Vegas Sands will be a tough competitor in the region. Las Vegas Sands has a strong track record of pleasing governments, and its Singapore operations have already been touted by some Japanese government officials, including Prime Minister Shinzo Abe as the model kind of integrated resort they would like to have in Japan. While MGM Resorts does seem to have a strong bid for a casino in Japan, Las Vegas Sands is looking like the stronger bet here.

Foolish final bet: Is MGM a good play now?

MGM did well in Q2, and its gain in Las Vegas should not be undervalued. For investors who believe in the comeback potential of Las Vegas and want to bet on U.S. gaming, MGM Resorts might be just that play.

However, consider that the company's strong Q2 performance and analyst estimate beat was still well below the global revenue growth posted by Las Vegas Sands and Wynn Resorts. Additionally, while MGM continues to be excited about prospects in Macau and Japan, the company is still not the best positioned in either place to be the ultimate winner.

Finally, from a valuation standpoint, MGM Resorts is still expensive by P/E, both right now and by 2015 year-end estimates. At a P/E multiple more than double Wynn's and nearly three times as high as Las Vegas Sands', the company would have to show a very large "Vegas comeback" to make it the most attractive in the field.