MGM Is Ready to Pop
With increased foot traffic in Las Vegas and growing consumer confidence throughout the country, MGM Resorts (NYS: MGM) is set up to be the casino industry's biggest winner.
MGM's stock has been crushed over the past few years, as many of the casino operators were. The chart below shows the industry falling from the highs of late 2007. Note that MGM has been the slowest to show any signs of recovery.
While Wynn Resorts (NAS: WYNN) stock has performed the best thus far, Las Vegas Sands (NYS: LVS) and Penn National Gaming (NAS: PENN) have both shown signs of recovery since hitting the bottom during 2009. Wynn and Las Vegas Sands have bounced back faster because of strong revenue growth coming from new markets in Asia, a market MGM was late to enter. While competitors were moving across the Pacific, MGM was still heavily focused on its operations in Las Vegas.
Three years ago, no one felt the city in the desert had a chance, and in most aspects it didn't: consumer confidence was low, spenders became savers, and unemployment nationwide was increasing. Now, the situation in Las Vegas is slowly getting better. November marked the 21st straight month the number of visitors to the city increased, and house gaming wins were up 5.2% for the first 11 months of 2011. If all these trends continue, MGM Resorts will benefit hugely from a Las Vegas revival.
Not just casino operators
Over the past few years, Las Vegas has seen gaming revenue trend downward. Currently, gaming revenue in Nevada is at an all-time low, accounting for only 46.2% of the total. So finding more money from other aspects of the business is the key to survival. Companies like Wynn, Sands and Boyd Gaming (NYS: BYD) rely on gambling for approximately 75% of revenue. MGM, on the other hand, is more reliant on food, beverage, entertainment, and room revenue -- only 51% comes from the casino.
Rooms and rates
For hotel operators, one of the best ways to increase a balance sheet is by raising room rates. When room rates increase, costs stay flat, allowing the new revenue to move down to the bottom line. Since MGM owns and operates 30% of all the rooms on the strip, and the overall room rate in 2011 has increased 10.8% over the prior year, the company could see a large boost in profits.
Higher demand and lower supply allows the city to charge elevated room rates. In 2011, 84.8% of Las Vegas' 150,000 plus rooms were occupied again over the prior year, and the city realized a visitor volume increase of 4.4% from 2010. With higher room occupancy and more traffic, there will likely be a decrease in the number of hot room deals Las Vegas used to offer in the past to help fill vacant rooms. That will further allow the average room rate to continue rising.
On Dec. 22, the Nevada gaming commission posted rules and governing guidelines for the state pertaining to online poker. It spells out how the application process for service providers will be handled, how much each operator can profit from the games being played, and what information players signing up will need to provide. The writing is on the wall: This will happen. The only question is when.
MGM is already positioned to benefit from this new revolution with its joint venture with Boyd Gaming and Bwin.Party. Wynn has also teamed up with an online poker company, but Las Vegas Sands is still standing outside the party all alone. Based on Fool writer Travis Hoium's estimates, MGM Resorts could see an increase of $75 million in EBITDA if online poker becomes legal. (Boyd would see much less because its stake is only 10%.)
MGM still has a long way to shore up a balance sheet that is weighed down with $13.5 billion in debt. But with online gaming on the horizon and increased travel to Sin City, I feel MGM Resorts is positioned to realize better returns than its competitors in 2012. That's why I have made a positive CAPScall for MGM Resorts. As much as I like MGM Resorts' future potential, I like another company even more: Find out what myself and thousands of others already know in this free report on the "next rule-breaking multibagger." Hurry, it won't last forever! Click here.
At the time this article was published At the time this article was written, Fool contributor Matt Thalman owned shares of MGM Resorts, but no other companies mentioned above. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.
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