The casino business has long been a high-risk industry because of the immense amounts of debt that companies take out to build new resorts. But that's changed with the growth of REITs in the gambling space.
As a result of the change in capital investment and the recovery in resort operations, MGM Resorts International (MGM -1.77%) has become a cash flow machine. Here's a look at how much cash the company is generating and where it's going.
The cash machine
Billions of dollars are invested up front to build properties that MGM hopes will generate revenue for decades.
A look at MGM's current operations shows just $2.66 billion in net debt after selling some of its holdings to Vici Properties earlier this year. Operating cash flow was $1.87 billion based on annualizing the first half of the year.
|Cash & equivalents||$5.78 billion|
|Long-term debt||$8.44 billion|
|Operating cash flow (annualized based on 1H 2022)||$1.87 billion|
What's notable here is that MGM China, which includes two resorts in Macao, accounts for $3.9 billion of that debt and has had a negative impact on operations. COVID restrictions in Macau have resulted in a more than three-quarters drop in revenue from pre-pandemic levels. So Las Vegas has returned in full force, but Macao has been a drag. If Macao ever returns to its earlier form, cash flow could easily double based on previous performance.
What MGM is doing with its cash
MGM is generating significant cash flow from both selling real estate assets to REITs as well as from operations. So where is that money going?
In the first half of the year, MGM bought back $2.1 billion of stock, which is an incredibly high amount for a company with a market cap of $13.9 billion. The company also pays a small dividend, but right now MGM is quickly buying back stock with its excess cash.
Why not spend on growth? There's nowhere to grow right now and that's a good thing for the casino business.
The moat in Las Vegas and Macao
The fact that there's not much building going on in Las Vegas or Macao right now is a moat for MGM Resorts. Las Vegas doesn't have much appetite to increase supply after the bankruptcies and abandoned projects during the financial crisis. Macao is highly regulated and isn't increasing supply even if the region does recover.
Cash that keeps coming in to MGM only has two places to go. The company can reinvest in existing properties, which it does to a small extent, or it can return cash to shareholders. That's what we're seeing right now.
Casinos are a great cash flow business
MGM Resorts has an enterprise value (net debt plus cash) of $16.6 billion and operating cash flow of $1.87 billion on an annualized business with no real contribution from Macao. Investors are getting an enterprise value to operating cash flow multiple of 8.9 times with Macao for free. That's a great investment, and the long term should reward buy-and-hold shareholders.