Are MGM Earnings Headed Into the Black?

MGM Resorts (MGM 0.18%) will release its quarterly report next Tuesday, and although the casino company has long been a laggard in the industry, it now looks possible that MGM earnings will go positive this quarter. If it accomplishes that important milestone, then MGM stock could continue its healthy run over the past year.

The reason that MGM struggled for so many years was that it largely missed out on the revolutionary growth in the Asian gaming industry, with only minimal exposure to the huge growth market of Macau. Now, though, MGM has turned its attention to the high-growth Cotai Strip area in Macau, and although it still has a sizable debt load, low rates have helped it keep interest expense under control, while improving domestic conditions have also helped the company. Let's take an early look at what's been happening with MGM Resorts over the past quarter, and what we're likely to see in its quarterly report.

Stats on MGM Resorts

Source: Yahoo! Finance.

Will MGM earnings stay positive?
Analysts have gotten a lot more optimistic about the prospects for MGM earnings in recent months, reversing expectations for a quarterly deficit, and narrowing their loss estimates for the full 2013 year by $0.23 per share. The stock has responded quite well, jumping almost 20% since the end of April.

MGM has made reasonable progress lately, as it continues to consolidate and recover from its disastrous performance during the 2008 recession. In its most recent quarter, overall revenue rose 3% based largely on a 6% gain in Macau-based sales, while its domestic resorts saw a 12% rise in earnings before income tax, depreciation, and amortization.

After years of lagging behind Macau, Vegas is finally coming back, and MGM is trying to take advantage. Yet, at least so far, most of the progress has been at the high end of the market, with properties owned by Las Vegas Sands and Wynn Resorts reaping most of the sales gains. By contrast, lower-end accommodations from MGM and Caesars Entertainment haven't produced nearly the same revenue growth. If the Vegas recovery trickles down to more mainstream traffic, however, then MGM could be the next to benefit from the ongoing gains.

To try to bolster that growth, MGM made a smart strategic move by partnering with Southwest Airlines and Hyatt Hotels to combine their loyalty rewards programs, making it easier for members of all three programs to use points for each other's services. With greater access to potential new customers, MGM could see its business grow as a result of accepting points from Rapid Rewards and Hyatt Gold Passport members.

Still, the biggest key to MGM growth will be its ongoing Cotai project. With most of the new attention in Macau aimed at the Cotai Strip, MGM and Wynn are both stuck waiting for their respective casino development efforts to bear fruit, while Las Vegas Sands and Melco Crown reap the rewards of the area.

In the MGM earnings report, watch for the casino company to give the latest update on Macau, as well as looking at domestic numbers. If the disconnect between gaming in the U.S. and China continues, then it could take a long time for MGM to become profitable enough to start getting its debt paid down and get out of long-term danger.

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