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MGM's Q3 Earnings: Rising Revenue, but Income Losses

By Bradley Seth McNew – Oct 30, 2014 at 12:40PM

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MGM was the only major gaming company to report an increase in revenue during Q3, but do these numbers really mean the company is the best play?

MGM Resorts International (MGM 0.24%) announced another quarter of rising year-over-year revenues this morning, mainly driven by increased wins in Las Vegas. However income losses and decreasing EBITDA domestically are concerning. MGM was the last of the three major gaming competitors to report Q3 earnings, following Las Vegas Sands (LVS 0.94%) and Wynn Resorts (WYNN 0.14%), which each reported their own struggles in Q3, mostly due to declining gaming revenues in Macau. While rising revenue is a positive sign for MGM, investors shouldn't get lost in the slight rise while income is still at a loss. MGM reported a diluted loss per share in Q3 of $­­­0.04 compared to diluted loss per share of $0.05 in the year-ago quarter. Let's take a look at what MGM Resorts' Q3 earnings show.

Is Las Vegas still a winning trend?
For these Q3 results, MGM posted slight revenue rises resulting mostly from better top-line revenue in Las Vegas, the company's largest market. MGM's Q3 results initially look as easy as 1, 2, 3: 1% net revenue increase, 2% adjusted EBITDA increase, and 3% top-line revenue growth from Las Vegas operations, year over year. Additionally, the company posted 6% growth in revenue per available room (RevPAR) for its Las Vegas Strip properties year over year.

While MGM's revenues and RevPAR are growing in Las Vegas, the company still reported a 6% decrease for its domestic adjusted EBITDA and a total net income loss of over $20 million. MGM management noted that this was "primarily due to a decrease in table games hold percentage at its Las Vegas Strip resorts which negatively affected Adjusted Property EBITDA". Hold percentage is the portion of money gambled that the casino keeps. Maybe those claims of the "Las Vegas comeback" were made too quickly last quarter.

Macau is proving to be much more profitable than Las Vegas even in the face of slowing gaming revenue there. Only about one-third of MGM's total revenue comes from Macau. Still the company posted better EBITDA growth in Macau than in Vegas. For it's Q3 China operations, MGM reported a 12% increase in adjusted EBITDA.

The older side of Macau, on the other side of the island from the newer Cotai strip, and the only place in Macau that MGM currently has an open casino. Photo by the author, October 2014.

Macau is still more profitable than Las Vegas, and other companies are an ever better bet on more future growth there, at much more attractive valuations than MGM. Look at the Q3 results, valuations, and future potential of other gaming competitors to look for the best bet in this industry now.

Las Vegas Sands and Wynn: Decreased revenues but much more income
Las Vegas Sands and Wynn Resorts each posted declining revenues during the third quarter, year over year, due to lowered gross gaming revenue in Macau. Still, Las Vegas Sands posted the most profitable quarter of the three gaming companies by income growth, at nearly 7.2% growth year over year during the quarter, with Wynn a close second at 6.5% income growth YoY.

And while Sands reported a decrease in year-over-year quarterly revenue during Q3, that comes from total revenue that is still nearly double that of MGM. Furthermore, both Wynn and Las Vegas Sands have reported much stronger growth in the first half of the year by both revenue and income, meaning that 2014 year-end results should still show that MGM is the weakest of the three companies this year.

As for future growth potential, MGM is hoping to make fresh gains from Las Vegas, but the company is still making more bets on Macau with its new MGM resort slated to come to the Macau Cotai strip in fall 2016. The resort will more than double the amount of available rooms the company has in Macau.

Source: Las Vegas Sands Q3 2014 Earnings Presentation

However, the company will be the last of the major gaming companies to open a new resort in Macau, and one of the first, Las Vegas Sands, looks to be the best bet now. The Parisian, Las Vegas Sands' newest resort to come to the already Sands-dominated Cotai strip, will include over 3,000 hotel rooms and suites, around 450 table games, 2,500 slots, a retail mall, and a replica of the Eiffel Tower at 50% scale. It is slated to open in late 2015. Wynn also has a new resort coming to the Cotai strip expected to open in early 2016, also ahead of MGM's coming resort there.

Foolish thoughts
MGM's Q3 results, regardless of rising revenue, are still not very appealing. With decreasing domestic EBITDA and total income, the company is still reporting much less earnings growth than competitors Las Vegas Sands and Wynn Resorts. 

All of these stocks have been beaten down over the past few months, as investors have feared lowered revenues this year in Macau. Now, many of the stocks with the heaviest bet on Macau are trading at very attractive valuations. For example, Las Vegas Sands trading at a price of 18.4 times earnings following its recent dip looks like a great play ahead of the Parisian opening in Macau next year. Wynn, at a P/E of 22.7, also looks attractive when compared to MGM at a P/E of 74 times. With Macau still posting much better results than Las Vegas, betting on more Macau growth at lower prices seems to to be the winning bet now.

Bradley Seth McNew owns shares of Las Vegas Sands. The Motley Fool has no position in any of the stocks mentioned. 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.

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