Buy MGM Resorts International? 5 Reasons Yes; 1 Big Reason No

MGM Resorts International (MGM 0.02%) was a top gaming industry bet in 2014, at least in that its share price fell less than most of its competitors, including Las Vegas Sands (LVS -8.66%) and Wynn Resorts (WYNN -1.42%), which each had a very tough second half of the year due to political issues in Macau, their largest market. MGM has looked like a winner lately due to its smaller bet on Macau, and its dominance in Las Vegas, which has been growing recently.

With these strong points for MGM, is it a buy now? Here are five reasons why MGM does look good now, but one big reason that it might be too risky. 

5 tailwinds for MGM

1. Las Vegas overall growth 
Rising consumer confidence in the U.S., increased consumer spending, and a more diversified mix of non-gaming attractions in Las Vegas have helped this gambling hub also become a place of entertainment, resort vacations, convention and business meetings, and other non-gaming activities. All of these Vegas growth drivers worked together and in 2014 Las Vegas welcomed a record 41 million guests. MGM has the largest presence in Las Vegas, with 11 major properties there and more and more share of the hotel, convention, and entertainment revenue. 

2. Even better hotel numbers in 2015
According to Travel Agent Central, the entire city of Las Vegas reached 87% occupancy in 2014, which is 20 percentage points higher than the national average and means Las Vegas has higher hotel occupancy rates than any other destination in North America. In 2014, MGM had about 27% of the hotel rooms in Las Vegas, making it by far the largest hotelier in the city. 

MGM's revenue per available room, or RevPAR, at its Las Vegas resorts rose over 6% in 2014 over the prior year. Another bullish point for MGM is that the company was busy remodeling many of its Las Vegas properties in 2014, so expect these numbers to increase even further in 2015.

A rendered view of what The Arena is expected to look like when it opens. Image source: ArenaLasVegas.com

3. The Arena
With gambling now making up only one-third of Las Vegas revenue, its lowest in recorded history, MGM is instead seeking to grow in other ways like hotels and convention space. One such major bet the company is making is to construct Las Vegas' largest arena with partner Anschutz Entertainment Group, or AEG. This massive 20,000-seat arena will be the biggest in Las Vegas, and will help to drive even more non-gaming growth in Las Vegas for years to come as a space for sporting events, concerts, and more. The project is expected to be completed in spring 2016.  

4. New resorts in the U.S. Northeast
MGM's next major U.S. casino is not in Las Vegas, but actually in Maryland. The Maryland National Harbor casino is slated to open in 2016 on a 1.7-million-square-foot property, not far from Washington D.C.. Following that, the company has plans to construct another casino in Springfield, Mass., with construction expected to begin sometime this year and be completed in 2017.

5. New resort in Macau 
In China., MGM is still completing its next resort in Macau. Regardless of Macau's recent downturn, total gambling revenue and profit in Macau is still by far the highest in the world. And with the mass market there continuing to grow, which will hopefully replace the lost VIP segment that has been the source of the Macau gaming industry woes of late, MGM could still make some major gains with its new resort in Macau, which is scheduled to open sometime in 2016.

But one big reason I wouldn't bet on MGM now
While the company does have some impressive tailwinds, it's still posting losses. Its most recent loss of $150 million in 2014 looked dismal compared to Wynn and Las Vegas Sands. In fact, In 2014, Las Vegas Sands actually grew its total income by 23% year over year, to $2.84 billion, despite Macau issues.

It's not just the fact that MGM is still losing money that concerns me, because the company does look poised to start raising earnings to be net income positive in 2015. Instead, what concerns me is how much debt the company has taken on for its current growth. MGM already has the second highest total debt in the industry (and will be the debt leader if Caesars Entertainment completes its bankruptcy reorganization). The company announced in November that it had issued over $1 billion in senior notes due in 2023, bringing its total debt to a whopping $14 billion. Using debt to finance new growth is not inherently bad, and even well-performing Las Vegas Sands has taken on debt for its own Macau expansion, but LVS is also generating about four times as much operating cash flow and is consistently raising earnings each year. 

While MGM's growth in Vegas, new attractions there, and even its new resorts in the U.S. and China could help to spur future growth, the company is too highly leveraged, to the point that if some of these new resorts don't perform as expected (or if there is another recession, any number of external events lower expected earnings, or if MGM simply can't become profitable soon enough) then that highly leveraged business model could become a major issue  for MGM and its investors. Until the company can prove much more profitability, its level of debt is just too risky a bet.