MGM Resorts' (NYSE:MGM) recently reported fourth-quarter results showed some substantial improvements in operations, even if they weren't enough to please investors. Las Vegas and Macau improved, while asset sales have led to a better balance sheet.
But with MGM's sprawling business, it's sometimes important to take a step back and see how the quarter's results play into the bigger picture. Here's what I took away from the quarter.
Results are improving, but how much?
MGM's fourth-quarter results showed a modest improvement when you adjust for the addition of MGM National Harbor and the acquisition of the rest of Borgata. After pulling those two out, earnings before interest, taxes, depreciation, and amortization (EBITDA) rose 1.7% to $438 million for domestic results. MGM China's EBITDA rose from $131 million a year ago to $137.5 million in the most recent quarter.
The takeaway is that results are improving at the underlying resorts MGM owns. But they're not improving dramatically, mainly due to macro pressures on Las Vegas and Macau's competition.
Asset sales pay off quickly
Helping MGM's balance sheet over the past year has been the sale of assets that don't have anything to do with running a casino or hotel. CityCenter sold The Shops at Crystals, which resulted in a $540 million distribution to MGM. MGM Growth Properties was also launched in a $1.2 billion offering, which spins off some of the company's real estate properties into a company that can hypothetically have a lower rate of return.
Selling non-core assets is generally a good idea and it's been a focus of gaming companies for years. But I'm more concerned about what MGM is doing with this newfound cash.
Why I'm leery of MGM Resorts
The one problem that keeps me from going all-in on MGM Resorts is the company's seeming inability to stop expanding. MGM National Harbor near Washington, D.C., seems like an unnecessary use of $1.3 billion given the massively competitive East Coast market. Spending $900 million on the half of Borgata it didn't own seems questionable in a long-declining Atlantic City market. Then there's the $950 million being spent to build a casino in Springfield, Massachusetts.
These investments seem to be more about empire building than generating a strong return on investment and de-risking the balance sheet. These funds could have been used to pay down debt or increase the dividend, but instead they're being put to work in the increasingly saturated East Coast gaming market.
A mixed bag for MGM Resorts
MGM's latest earnings report shows both sides of the gaming industry today and that's the problem. On one hand, the company is generating solid cash flow from existing resorts and is selling off non-core assets for solid prices. On the other hand, it is on a constant search for growth, and the investments it's making are questionable given the competition in regional gaming markets. Investors should ask if management is growing just for growth's sake.
MGM has been one of the best stocks in gaming because of its roots in Las Vegas, but with Macau in recovery, it may be lagging more Asian-focused competitors. And betting big on the East Coast over Asia (think Japan) may be a move its management eventually regrets.