What happened

Shares of world-class resort operator MGM Resorts International (MGM -5.01%) surged 19.7% in October, according to data compiled by S&P Global Market Intelligence, on no specific company news, though the broader market itself was 8% higher for the month.

MGM was also heading into an early November earnings report that was expected to beat Wall Street profit forecasts, but when the report was issued the casino operator showed a surprise loss that caused its stock to crater more than 10%. 

Roulette wheel.

Image source: Getty Images.

So what

MGM far outperformed peers Las Vegas Sands and Wynn Resorts in October largely on it not having as much exposure to China as they do. China continues to go to extremes on a zero-tolerance COVID-19 policy -- it recently locked thousands of guests inside Walt Disney's Shanghai Disneyland after a woman who had visited the theme park days earlier tested positive, according to Deadline -- meaning Macao casinos are all but dead.

Sands and Wynn, which are both heavily reliant upon Macao for the vast majority of their revenue, both rose less than 2% in October compared to MGM's near 20% gain. Macao only represented about 20% of MGM's pre-pandemic revenue, while it dominates the Las Vegas Strip and has numerous regional casinos. 

Even so, MGM's earnings took a big hit due to a $1.2 billion noncash charge to a change in the useful life of its Macao-based MGM Grand Paradise gaming subconcession as a result of the COVID-19 crackdown. It also didn't have the benefit of the $2.3 billion gain it recorded a year ago on the consolidation of CityCenter, a complex on the Strip that included the Aria casino and Vdara hotel, which it subsequently sold.

Now what

While the adjustments led MGM to report a loss of $1.39 per share compared to the expected $0.26-per-share profit, the resort operator noted the Strip generated the most revenue in MGM's history and it also saw record adjusted property earnings before interest, taxes, depreciation, amortization, and rent (EBITDAR), which is a proxy for cash flow from resorts. 

It also acquired LeoVegas, a global online gaming and sports betting company, and submitted its application for a new 10-year gaming concession in Macao.

The response to MGM's earnings doesn't seem consistent with the underlying strength of its main business, even in these questionable economic times, and the casino stock seems to be value priced at 8 times trailing earnings and less than 9 times the free cash flow it produces.