Mgm Resorts International

Courtesy MGM Resorts

MGM Resorts International (NYSE:MGM) may look like the most compelling play in the gaming industry now. The industry as a whole has sunk recently and competitors like Las Vegas Sands (NYSE:LVS) and Wynn Resorts (NASDAQ:WYNN) have each seen massive share price declines in the last few months as Macau gaming revenues have dropped. With a smaller bet on Macau, and Las Vegas gaming revenues starting to pick up again, MGM has not seen as steep a share price decline as competitors. However, the company will still face headwinds in the coming quarters and years, and here are three reasons the stock may fall.

1) A new major threat in Las Vegas
In the most recent quarter, MGM beat analyst earnings-per-share estimates by 75%, following revenue of $2.6 billion, which was up 4% over the same quarter last year. The reason that MGM was able to make these kinds of advances was due to a surprise boost in Las Vegas operations. Some analysts are calling this the "Las Vegas comeback" as gaming revenues in the city are starting to pick up back near their pre-2008 financial crisis highs. 

However, those Las Vegas revenues that are picking back up and helping to boost MGM's earnings may be cut out from under them soon because of the newest resort being built in Las Vegas by Malaysian gaming company Genting. The $4 billion Resorts World Las Vegas, set to have its first phase open next year, looks like it might be the biggest thing to hit the Vegas strip in some time.

Resorts World Rendering

Rendering of what Resorts World Las Vegas could look like. Courtesy: Genting

This Asian-themed resort will include 3,000 table positions, three hotel towers, a Terra-cotta warrior exhibit, live pandas, and a Great Wall replica. The company has even rumored talks of partnering with a media company to add a theme park to the resort. 

While Las Vegas has been a boost for MGM so far this year, competition in the city is intense and about to get even more so. Price and visitation competition, possibly meaning lowered revenues, could cause a lowered outlook on MGM, and likely a lowered stock price. 

2) MGM will be the the last player to expand in Macau
MGM Resorts gets only a third of its global profit from Macau, versus more than two-thirds for Wynn Resorts and Las Vegas Sands. Therefore, volatility in Macau will result in less harm to MGM's global performance. This is the main reason that Las Vegas Sands and Wynn Resorts have been hammered more than MGM recently. However, while this past summer was not so hot for Macau, the next two years look like they will still be huge revenue drivers in this Asian gaming hub and MGM will be last one with a chance to get in on more of that growth. 

The Parisian

Las Vegas Sands' The Parisian, with a 50% scale Eiffel Tower. Courtesy: Las Vegas Sands

Macau is still the largest gaming market in the world by far, and each major casino company is getting ready to open a new resort there in the next 12-24 months including Las Vegas Sands, Wynn Resorts, and MGM. Las Vegas Sands' new Parisian resort is likely to open in Q3 2015, and the new Wynn resort will open one or two quarters later. But after the Parisian has had a whole year of operations, MGM will be the last to open its new resort in 2016.

Not only is it the last to open, but in terms of the size of the bet, it's one of the smallest. While Sands' new resort boasts an increase of over 3,000 rooms, MGM's new resort is planned to include just 1,600 rooms. This past summer has certainly been rough for Macau gaming companies, but the next couple of years still look very positive. For that, when other companies are reaping rewards from larger bets on Macau, MGM will be left out and that could make investors switch their bets to more aggressively growing companies like Las Vegas Sands and Wynn.

3) MGM's high debt and low cash could lead to less development opportunities
MGM's debt to equity ratio is around 37% higher than that of Las Vegas Sands'. However, what really makes this concerning is whether or not the company has the ability to continue taking care of it's debt obligations, while having the ability to invest in future growth and development. While MGM's total debt of nearly $13 billion is higher than that of Las Vegas Sands at $10.4 billion, MGM's operating cash flow is just $1.4 billion compared to LVS's $4.81 billion. 

In the casino and resort industry, the ability to make large investments is important. This is seen in MGM's expansion in Las Vegas in the past, and Las Vegas Sands' new properties around Asia. However, MGM Resorts may find it is stuck without the option to fund future growth opportunities if the company can't contain its already large debt, or expand it's cash flow.

Could MGM still be winning bet?
Yes, it could be. While these three risks are important for investors to watch out for, MGM's future prospects in Las Vegas could be promising. For investing in the Las Vegas comeback, MGM Resorts might be a good play.

Yet with new competition coming from Genting in Las Vegas, these gains MGM has made might be taken away. And if it's not Las Vegas that will add growth for MGM, it probably won't be Macau either as Las Vegas Sands and Wynn are making quicker and bigger bets there. Additionally, MGM is still the most expensive.

Metric

MGM Resorts

Wynn Resorts

Las Vegas Sands

Q1 Net Revenue Growth YOY

12%

9.7%

21.4%

Q2 Net Revenue Growth YOY

4%

6%

12%

Share Price (mid-October)

$20

$175

$59

P/E multiple (TTM)

69.4

21.7

18.4

2015 year end est. P/E

30.2

20 15.1

Source: Yahoo! Finance.

While MGM was the safer bet following lowered Macau revenue over the summer and higher Las Vegas revenues so far this year, Q3 earnings reports are coming up and MGM will likley once again be reporting less revenue and income growth than competitors. When that happens, investors might look for stocks trading at a better value since MGM shares trade at more than 70 times earnings.

Bradley Seth McNew owns shares of Las Vegas Sands. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.