MGM Resorts International (NYSE:MGM) stock is slightly higher in midday trading. That comes a day after the company reported third-quarter results that missed Wall Street forecasts, while revealing some softness on the Las Vegas Strip.
For the three months ending Sept. 30, the gaming company earned 31 cents per share on revenue of $3.31 billion, but analysts expected earnings of 33 cents on turnover of $3.33 billion. The Las Vegas Strip, where MGM is the dominant operator, was a source of contention for analysts and investors, as the company reported third-quarter adjusted property earnings before interest, taxes, depreciation and amortization (EBITDA) there of $441 million, well below the $454 million analysts were expecting.
Stifel analyst Steven Wieczynski called MGM’s third-quarter results “squishy at best,” while noting executive comments on possible asset sales, share buybacks, and the “MGM 2020” cost-cutting initiative, among other factors, are likely to distract investors from focusing on the most recent earnings.
With all of that said, we find ourselves with mixed emotions on the ‘new’ MGM investment case,” said Wieczynski. “On the one hand, we welcome evidence of continued margin improvement across the domestic portfolio. Additionally, we are encouraged by the continued ramp of business volumes at MGM Cotai and the recently developed/acquired domestic properties.”
On a Wednesday afternoon conference call with analysts and investors, CEO Jim Murren highlighted strength in the company’s regional portfolio, highlighting the Borgata in Atlantic City, N.J. and MGM National Harbor in Baltimore.
Surprising Point Of View
Earlier this month, MGM announced the sales of the Bellagio and Circus Circus on the Strip, deals that will net the gaming company $4.3 billion in cash that will be used to reduce debt and boost share buyback and dividends.
Those deals, which were widely expected, have drawn some praise from the investment community, and MGM stock has traded modestly higher since those announcements. But Wieczynski isn’t a fan of MGM’s real estate monetization efforts.
“Look, we get it, if someone is willing to offer you ~17x to acquire one of your assets and you are running a company that is fighting a leverage headwind, it might seem logical to strike while the iron is hot,” said the Stifel analyst.
“That said, we believe this short-sighted decision introduces an elevated level of long-term risk to the story, as it not only significantly increases lease-adjusted leverage, but it also robs the operating entity from its most stable tangible asset/downside protection vehicle (i.e. its real estate).”
The analyst is referring to the sale/leaseback of the Bellagio to Blackstone, in which the private equity company is doling out 17.3x the $245 million in annual rent MGM is agreeing to pay on the property.
While Wieczynski has his doubts about MGM real estate sales, Murren said on yesterday’s call that a similar deal for the MGM Grand on the Strip could be announced earlier next year, and the CEO was quick to highlight the company’s other valuable assets in the form of MGM Springfield, half ownership of CityCenter, and a 68 percent stake in MGM Growth Properties (NYSE:MGP).
Some analysts previously expressed doubt that the gaming company would look to materially reduce its stake in MGP, because MGM collected $333 million in dividends from the real estate company last year.
Asset Light Not All It’s Cracked Up To Be
Murren has long extolled the virtues of moving to an “asset light” model. But Wieczynski thinks that transition forces investors to reassess views on MGM stock.
“As supported by the multiples being paid for gaming real estate today, we would contend the overwhelming majority of the business lies in the hard assets that MGM is electing to sell,” said the analyst. “That said, absent the real estate, we believe investors will have to think long and hard about how to properly value MGM’s ‘asset light’ operations, particularly upon considering the overwhelming majority of the operations are concentrated in a market that has proven relatively volatile during prior shocks to the US macro economy.”
The Stifel analyst has a “hold” rating and $32 price target on MGM.