We remain Neutral on MGM Resorts International (MGM) over the long term. Better-than-expected second quarter 2011 earnings, improving business trends in Las Vegas, the acquisition of a controlling interest in MGM China and the booming Macau operation are partially offset by steep competition, still faltering consumer confidence and the risk of cannibalization by its new property, CityCenter, in Las Vegas.
MGM Resorts’ second-quarter 2011 adjusted loss per share was better than the Zacks Consensus Estimate aided by the expansion of the company’s controlling stake from 50% to 51% in MGM China Holdings Limited at the time of going public on the Hong Kong stock exchange in June. The company’s net revenue also jumped substantially and breezed past the Zacks Consensus Estimate.
Given its strong brand name, we believe that MGM Resorts is better positioned to command a premium rate relative to the overall gaming and lodging industry. The company’s properties are well diversified within the U.S. and overseas. Apart from the U.S. and China; the company has a significant presence in Abu Dhabi and Dubai. The geographical diversification can shield the company from a regional downturn.
In Macau, MGM continues to benefit from robust market growth and drives a solid share of the total revenue. Macau is the largest gaming destination in the world. We expect MGM Macau to continue to generate growth with the recent addition of extra amenities like Platinum area on the mass floor and incremental VIP space.
The company intends to expand further in Asia and the first hotel is expected to come on stream this year in Sanya on Hainan Island, China. MGM also expects to have its properties in several other cities in China such as Beijing, Chengdu, Tianjin and Nanjing.
On the flip side, competition is heating up in all marketplaces like Nevada, Mississippi, Michigan, Illinois and Macau. Both MGM Resorts’ big time competitors Wynn Resorts Limited (WYNN) and Las Vegas Sands Corp. (LVS) have a solid presence in the booming Macau. At Cotai Strip in Macau, MGM Resorts is still awaiting an approval for land while Las Vegas Sands intends to come up with a portion of its Parcel 5 and 6 developments in 2012 and Wynn Resorts recently received the long-awaited approval from the Macau Government.
Additionally, we believe that the recovery, particularly in the Las Vegas market, still has a way to go. MGM Resort currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.
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