Years of development are finally beginning to pay off for MGM Resorts (NYSE:MGM), and the company should be entering a new stage of its life as a cash-flow machine. Its second-quarter earnings presentation centered on the company's projections for 2020, when MGM Cotai will be fully ramped and MGM Springfield will be operational.
The numbers management is projecting are optimistic but also within reach, given the trends in gaming today. Here's why they're a reminder of what a great value MGM Resorts is long term.
MGM Resorts has a lot going for it
MGM Resorts' foundations in Las Vegas, regional U.S. markets, and Macau form a great base on which to build. In the first six months of 2018 the company generated $1.6 billion of EBITDA, a proxy for cash flow from resorts, and an annualized rate of $3.2 billion.
Those results, though, don't include the soon-to-arrive income stream from MGM Springfield, which will open later this month, nor do they factor in what a fully ramped MGM Cotai will draw. In the second quarter, MGM Cotai generated $20.1 million of EBITDA, but after it starts offering its junket rooms and high-end hotel rooms, the property will likely generate in the neighborhood of $500 million of annual EBITDA on its own.
Between its existing assets and its new and recently opened properties, MGM Resorts is on a path to steady growth.
Projecting out to 2020
With that backdrop, we can put the company's potential value into perspective. Management projects $3.50 per share in consolidated adjusted free cash flow per share in 2020. Shares trade at just 8.2 times that level today, which is a great value.
Another metric I like to look at is enterprise value (market cap plus net debt) divided by EBITDA. A ratio under 10 is usually where I consider gaming stocks to be values, and MGM may be well below that long term.
MGM's current market cap is $15.9 billion, and its net debt is $12.3 billion, which add up to an enterprise value of $28.2 billion. Management expects 2020 consolidated adjusted EBITDA in 2020 to be in the $3.6 billion to $3.9 billion range. At the midpoint, its enterprise value is just 7.5 times 2020 adjusted EBITDA, well into what I consider value territory.
Japan would send MGM Resorts soaring
Based on all this, MGM Resorts stock is a great value as it stands today. If the company were to win one of the few gaming concessions Japan will soon distribute, that could really send shares soaring.
Japan could become the second- or third-biggest gaming market in the world: Analysts project it will produce over $10 billion in annual gaming revenue, and only two or three resorts will be licensed to capture it. The cost of building a casino resort in Japan could be $10 billion, but the payoff could be one of the most profitable casinos in the world. That's upside I'll take any day.