Has MGM Resorts Become the Perfect Stock?
Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?
One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if MGM Resorts (NYS: MGM) fits the bill.
The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:
- Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
- Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
- Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
- Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
- Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
- Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.
With those factors in mind, let's take a closer look at MGM Resorts.
What We Want to See
Pass or Fail?
5-Year Annual Revenue Growth > 15%
1-Year Revenue Growth > 12%
Gross Margin > 35%
Net Margin > 15%
Debt to Equity < 50%
Current Ratio > 1.3
Return on Equity > 15%
Normalized P/E < 20
Current Yield > 2%
5-Year Dividend Growth > 10%
3 out of 9
Source: S&P Capital IQ. NM = not meaningful due to negative normalized earnings. Total score = number of passes.
When we looked at MGM Resorts last year, it only received two points. But the improvement comes largely from a one-time gain on a transaction involving MGM China that pushed up profit margins and return on equity but wasn't reflected in the company's normalized earnings.
MGM is a player in one of the biggest booms on the planet. Thanks to huge Asian growth, especially in Macau, competitors Las Vegas Sands (NYS: LVS) and Wynn Resorts (NAS: WYNN) have been able to grow strongly despite weakness in their U.S. markets, and Hong Kong-based Melco Crown Entertainment (NAS: MPEL) has made a name for itself in an industry once dominated by Las Vegas.
Unfortunately, MGM has retained a huge amount of U.S. exposure. Its CityCenter development in Las Vegas in particular has suffered, requiring huge inflows of capital from investors like Dubai World in order to keep it alive through the financial crisis. Elsewhere, the company maintains smaller casinos, but it has to compete against Ameristar Casinos (NAS: ASCA) and Penn National Gaming (NAS: PENN) for share.
Among casino stocks, MGM's debt stands out as a sore spot. Until the company can resolve that debt and start expanding its presence in the hot Asian market, MGM Resorts won't come up aces as a perfect stock.
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.
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At the time this article was published
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