MGM Resorts International (NYSE:MGM) is raising the stakes for its success. During a recent investor day in June, the company announced a new forecast of total 2017 year-end adjusted EBITDA (earnings before interest, tax, depreciation and amortization) of $3.1 billion, up about 40% from the $2.2 billion logged in 2015. Is that a realistic goal, or is MGM too bullish on its own growth prospects?
What MGM believes will get it there
Management is looking to grow EBITDA in multiple ways, including organic growth, return on capital investments such as new casino openings, and more efficient operations.
1. Hotel growth in Las Vegas
More than 42 million visitors traveled to Las Vegas in 2015, about 1.2 million more than the previous year, and the growth trend is continuing so far in 2016. One of the most important ways MGM is growing in the region is through its hotel revenue.
MGM owns more properties on the Strip than any of its competitors and operates more than half of the 62,000 hotel rooms there. The company has successfully increased both average daily rates and occupancy, so its revenue per available room (RevPAR) grew 8% during the first quarter year-over-year from $136 to $147. This helped MGM increase its U.S. property-adjusted EBITDA 24% year-over-year during the quarter to $485 million.
2. A new East coast casino
Just outside of Washington D.C. at National Harbor, Maryland, MGM is preparing to open a new $1.3 billion casino resort this winter. The property features 300 hotel rooms, 3,600 slot machines, 140 gaming tables, and more.
Nearly four million people live within 25 miles of MGM National Harbor, and analysts at Fitch Ratings believe the new resort will generate $240 million of EBITDA in 2017.
3. A new resort in Macau
Macau has caused MGM much pain in the last two years as government intervention and other factors crippled the gaming market -- June gaming revenue was the lowest it has been since 2010.
However, Macau's woes may be bottoming out as industry followers believe year-over-year gaming growth could turn positive in 2016. That would be great timing as MGM is still building its more than $3 billion resort on the Cotai Strip with plans to open in early 2017.
Even at its current lows, Macau will generate about three times as much gaming revenue in 2016 as Las Vegas. MGM has a relatively small presence in Macau and only generated $114 million of adjusted EBITDA there in the first quarter. If Macau's fortunes stabilize or return to growth, MGM could see a major boost from this new resort opening.
4. PGP-Profit Growth Plan
MGM announced its "profit growth plan", or PGP, in 2015. The company plans to aggressively increase profitability through more efficiencies and higher margins from work force management and cost savings. During the June investor day, MGM raised guidance for how much PGP would contribute in added EBITDA by 2017 from $300 million to $400 million. So far, that seems to be working as MGM attributed $45 million of its first-quarter EBITDA to the success of PGP and plans for that to increase.
Is it too optimistic?
The growth areas above will not be without potential roadblocks. For one thing, MGM has stiff competition in both Macau and Las Vegas. Las Vegas Sands opened a new resort on the Cotai Strip early this year, and Wynn Resorts is preparing to open a new resort in August that will sit in front of MGM's property. Wynn also announced a redevelopment of its Las Vegas resort with an added 1,000 hotel rooms. And on top of that, a new 3,500-room resort called Resorts World Las Vegas is under construction for a planned 2018 opening on the north end of the Strip.
All in all, MGM is expected to post $9.15 billion revenue this year, about flat over 2015. To gauge if MGM is on track for its goal, watch for the EBITDA margin to creep closer to 30%, rising from about 24% in 2015. The PGP benefit should be $275 million for the year, and prospects in National Harbor and Macau look promising. If those areas stay on track, then MGM's prospects for reaching its $3.1 billion EBITDA goal by the end of next year actually look promising.