Shares of MGM Resorts (NYSE: MGM) and Boyd Gaming (NYSE: BYD) took off like a rocket on Tuesday after Bank of America/Merrill Lynch upgraded the stocks. The theory is that improving conditions in Las Vegas will drive both stocks higher, and that their high leverage will give investors leveraged returns.
But I need to throw a red challenge flag and question the soundness of that investment thesis.
First, there's a problem of valuation. Boyd is trading at a 12.2 enterprise value/EBITDA multiple, and MGM is a whopping 24.1 times multiple. Versus higher-growth competitors, these stocks aren't exactly cheap at these levels. I would much rather own stocks with exposure to high-growth areas in Asia, like Las Vegas Sands (NYSE: LVS) with a 21.1 EV/EBITDA multiple or Wynn Resorts (Nasdaq: WYNN) with a 18.7 multiple, than either Boyd or MGM.
Is Las Vegas really recovering?
Over the last 12 months, total gaming win is up 4.63% on the Las Vegas Strip. For Clark County (the home of Las Vegas), gaming win was only up 0.80% in the last 12 months. I could buy that The Strip is getting better, but locals aren't coming out in droves to sit at slot machines so why should we believe Boyd -- with a strong focus on the locals market -- is on the cusp of a comeback?
To make matters worse for Boyd, unemployment remains at nosebleed levels in Nevada. With national unemployment at 9%, Nevada has 14.5% of its workers still searching for a job. And the locals market is supposed to improve?
Neither Boyd nor MGM strikes me as particularly cheap or poised for massive growth over the next few years. If I have to choose between the two, MGM seems more likely to benefit from improving trends in Las Vegas, but even there I'm skeptical of the company's valuation and debt burden. Boyd Gaming on the other hand has too much exposure to the locals market, a struggling customer base I don't see improving quickly.
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