MGM's beautiful resorts; hopefully they can add beautiful profits again this quarter. Source: MGM Resorts.
MGM Resorts International (MGM +1.06%) reports second-quarter earnings on Aug. 5, one day after Wynn Resorts (WYNN 0.85%) and two weeks after Las Vegas Sands (LVS 2.04%). Las Vegas Sands' second-quarter earnings release disappointed investors as its earnings per share came in slightly lower than expectations following a tough couple of months in Macau that included regulatory issues, competition for attention with the World Cup, and lower VIP revenue growth. In light of Sands' earnings miss, what should investors expect from MGM Resorts' second-quarter earnings release, and what are the company's long-term prospects?
What to expect from Macau in the second quarter and beyond
Las Vegas Sands reported EPS of $0.85 for the second quarter that missed analyst expectations of $0.90 in EPS. However, consider that analysts made that estimate following record-breaking results from Las Vegas Sands in the first quarter. The issues that caused its slower-than-usual revenue growth in Macau during this second quarter, such as possibly less attention dedicated to Macau during the World Cup and less growth in the VIP gaming segment, affected the entire industry and not just Las Vegas Sands. Thus, these factors will likely affect revenues for MGM Resorts and Wynn Resorts this quarter as well.
Wynn Resorts in Macau is still too much of a bet on the declining VIP segment. Photo source: New York Times.
This is especially true for Wynn Resorts, which has relied more heavily on VIP revenue than Las Vegas Sands. If the VIP segment drop caused Sands' revenue to temporarily drop, Wynn will likely see an even worse result. However, issues in Macau will be less troublesome for MGM Resorts, and here's why.
Three reasons that MGM's second quarter might look better:
- MGM made a bigger push into Macau's mass-market segment than its VIP segment, which has been down this quarter.
- MGM gets only 37% of its global profit from Macau, versus 75% for Wynn and 88% for Sands. Therefore, volatility in Macau will result in less harm to MGM's overall revenue.
- While the growth of Macau remains vital to MGM's continued revenue growth, the company is also one of the best prepared to gain from the return of the industry in Las Vegas.
Source: MGM Resorts.
MGM is a bet on the Vegas comeback
Las Vegas Sands has been able to post huge results because of its diversified revenue growth in Asia, particularly from Macau but also from its Singapore operations. Wynn, which gets 75% of its revenue from Macau, is much the same. However, MGM Resorts only gets 37% of its revenue from Macau, with the majority of its global revenue still coming from Las Vegas at about 50%, and it also gets additional revenue from the U.S.
MGM's Bellagio, one of the iconic casinos of Las Vegas that MGM hopes to rekindle
as one of the iconic resorts of the gaming world. Photo source: MGM.
Here is the Las Vegas comeback that could put MGM on top. In 2012, the Las Vegas gaming market as a whole still saw its EBITDA down 30% from the peak five years prior, though its net revenue climbed to a point just shy of that peak year in 2007. While total revenue from Vegas only climbed up slowly in 2013 and this year, some properties there are starting to see the rebound we've awaited. MGM Resorts grew faster than the industry in Las Vegas in 2013 and the trend is likely to continue this year. Higher room rates and cost efficiencies have led to incremental margins of more than 60% for MGM in Las Vegas.
Las Vegas or Asia?
Don't misunderstand, Las Vegas Sands still posted a solid quarter with a net income increase of 27% year over year. With year-over-year results that included net revenue up nearly 12% to $3.62 billion, EBITDA in Macau up 21.9%, and adjusted earnings per share up 29.7%, Las Vegas Sands remains the company to beat in the industry right now.
Sands has posted incredible five-year growth, and its recent dip created a good entry point for Foolish investors. Photos: Las Vegas Sands, Yahoo! Finance; Editing: Bradley Seth McNew.
Las Vegas Sands led the field in the first quarter of 2014 with revenue of a record $4.01 billion, up over 21% year over year. MGM Resorts came in a not-so-close second with revenue growth of barely more than half that of Las Vegas Sands, and Wynn came in third for this group. When all of the results are in for the second quarter, I'm expecting the same lineup.
| Metric |
MGM Resorts |
Wynn Resorts |
Las Vegas Sands |
|---|---|---|---|
|
Q1 Net Revenue Growth YOY |
12% |
9.7% |
21.4% |
|
Q1 Net Revenue Growth YOY |
TBA |
TBA |
12% |
|
Share Price in April |
$24.33 |
$219 |
$76 |
|
Share Price in July | $25.5 |
$204 |
$73.8 |
|
P/E (TM) | 249.8 |
27.6 |
24.1 |
|
P/E est. 2015 | 38.7 |
21.4 |
16.7 |
Source: Yahoo! Finance.
Foolish wrap-up: Las Vegas Sands or MGM Resorts?
Shares of gaming companies have been beaten down over the last few months on industry issues, regardless of the incredible first-quarter earnings of Las Vegas Sands, Wynn, and MGM Resorts. However, these issues are just noise and not good catalysts for long-term investment analysis. Foolish long-term investors should not miss the buying opportunity that this creates.
While I am personally betting on Las Vegas Sands to be the highest gainer in the second quarter, as it was in the first, as well as on the continued growth of gaming in Asia, investing in the coming Las Vegas recovery may not be a bad idea. For that, MGM Resorts would probably serve investors well since it's less of a bet on Macau and more of one on Las Vegas. For investors who are looking for the middle ground and want to get some profit from Macau with exposure to possible growth in U.S. revenue over the next few years, MGM Resorts looks like a great bet right now. Stay tuned for MGM's second-quarter results during the first week of August.
