MGM Resorts' (MGM -1.68%) stock has plunged 22% in the last six months along with every other gaming company that does business in Macau. Gaming revenue in the gaming enclave has plunged as China has cracked down on corruption, and investors are wondering if customers will ever return in the numbers we saw before.
But MGM Resorts is in a different position than competitors like Las Vegas Sands (LVS -0.78%) and Wynn Resorts (WYNN 0.21%), who get most of their revenue from Macau. MGM is still a Las Vegas centric company and that makes the stock one of the best positioned in the industry today.
Las Vegas is still going strong
Macau's gaming industry has struggled recently, falling 2.6% in 2014 to $44.1 billion. The decline was swift in the second half of the year with a 30.4% drop in gaming revenue coming in December. That's driven gaming stocks lower and MGM Resorts, naturally, was swept down with its peers.
But Las Vegas is still MGM Resorts' home and where it gets two-thirds of its revenue. Despite some spillover from China's anti-corruption campaign, Las Vegas is holding up relatively well. In the twelve months through November, Las Vegas Strip gaming revenue was up 1% to $6.48 billion.
In addition, Las Vegas isn't completely reliant on gaming for growth as Macau is. Over half of The Strip's revenue now comes from non-gaming activities and MGM Resorts owns some of the most popular hotels and nightclubs in Las Vegas, which are both driving revenue. That should hold up the company's profits until growth returns in Macau.
Growth in Macau will return
Macau has slowed down rapidly in 2014, but long-term the region is well positioned. It's the only part of China where gambling is legal and it's become an entertainment hub as well. With infrastructure improving like high-speed rail access in Mainland China and a bridge to Hong Kong, Macau is becoming an accessible vacation destination for billions of people living in Southeast Asia. But even if Macau as a whole doesn't start growing soon, MGM Resorts should see growth in the region.
In late 2016 MGM will open a resort in the heart of Cotai, the region that is now dominating Macau's mass market. The $2.6 billion resort will have 1,600 hotel rooms, 500 table games, and 2,500 slot machines. Considering the fact that the smaller Macau Peninsula resort it currently operates has generated $904 million in EBITDA -- a proxy for cash flow -- in the last year the Cotai resort will likely generate over $1 billion in EBITDA when it opens.
With Las Vegas performing reasonably well and Macau presenting a growth opportunity when the Cotai resort opens, MGM's operations are in a strong position today.
Investors are getting good value in MGM Resorts
Given MGM Resorts' current stock price; the company's enterprise value is just 8.6 times its EBITDA over the last twelve months. Historically, that's a fairly low multiple for a stock that has historically traded with a multiple between 10 and 15. If Las Vegas continues to grow, Macau recovers, and MGM's Cotai resort adds to earnings in a meaningful way, the stock could be prove a steal for investors today.
I think now is the time to start reconsidering MGM Resorts' stock as a value in the gaming industry. It isn't too reliant on Macau to be afraid of, yet has growth opportunities that could drive earnings growth over the next few years. With the stock trading at a reasonable value the odds are good for this gaming stock right now.