The market has soured on gaming companies like MGM Resorts (NYSE:MGM) in 2018, with the stock down 23% so far this year. Las Vegas is stagnant, Macau may be contracting, and there aren't a lot of growth opportunities available for big gaming companies today.
But the gaming business should be looked at as a cash machine, not a growth machine. With that lens, there's a lot to like about MGM Resorts today.
Las Vegas hits a lull
Third quarter results across the gaming industry have made investors a little nervous about the macro environment, but most negative signs are part of the natural ebb and flow in gaming. The Las Vegas Strip had a fairly weak quarter, partly due to tough year over year comparisons and partly because of a slow convention season. MGM's revenue per available room was down 3.9% to $146, a trend we've seen from Las Vegas Sands and Wynn Resorts as well.
The weakness hit up and down The Strip but was worst in the high-end resorts, where it's more about attracting high-rollers than getting volume in the front door. For example, Bellagio's revenue fell 15% versus a year ago to $322.1 million, and The Mirage had a 9% drop in revenue to $147.4 million.
Like its competitors, MGM Resorts said the convention business will pick up late in 2018 and into 2019. There are always these ups and downs to the convention business, and this is one of those down quarters which investors have come to expect from time to time.
What's important over the long long-term are the full-year trends for gaming, and Las Vegas Strip gaming volume was only down 1% over the past year, maintaining a fairly flat trend. The past few months were what drew that into negative territory, but six months from now the region sounds like it will be expanding slightly again.
Fears over Macau are always looming
The reaction to MGM's earnings report was centered around disappointment in Macau, where there are signs of a slowdown. MGM Macau's revenue was down slightly to $434.3 million in the quarter, and property EBITDA fell $2.9 million to $118.2 million. At MGM Cotai, which opened earlier this year, revenue was $171.8 million and EBITDA was $11.8 million.
The slow ramp of MGM Cotai was the biggest point of concern, but that's something we've seen time and again in Macau. It takes time for casinos to build a customer base and perfect their marketing strategies. MGM Macau took years to be the consistently profitable resort we see today.
What we know is that Macau is one of the most profitable places to build a casino in the world, and long-term there will be hundreds of millions flowing out of the region to shareholders annually. There will be ups and downs, but the cash machine is still strong in Macau, with $401.7 million of EBITDA generated in the first three months of 2018 alone.
MGM is as stable as it gets in gaming
MGM Resorts is still generating billions in cash each year that it can use to pay down debt, invest in growth, or pay back shareholders. Right now, its $0.12 per share quarterly dividend is a reasonable 1.9% dividend yield, and management bought back another $176 million of shares in the third quarter.
There will be ups and downs in Las Vegas and Macau, but at the end of the day both regions are cash machines for MGM Resorts. That's why I'm not worried about the stock long-term.