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Casinos

It could be time to roll the dice on MGM Add to ...

Investors are doubling down on casino operator MGM Resorts International as part of a larger bet on a recovery in the global gambling market.

Shares in MGM, one of the world’s largest gambling and hospitality companies, have climbed 17 per cent over the past month and 85 per cent during the past year, driven by optimism about the company’s renewed prospects for growth in markets across the United States and China.

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Analysts say the company, which operates such Las Vegas landmarks as the Bellagio and MGM Grand, is tackling its heavy debt load and is now well positioned to take advantage of a pickup in the Nevada entertainment market.

Another bright spot is the surge in gambling in Macau, a market estimated to be seven times the size of Las Vegas. Gambling revenue in Macau rose 18.5 per cent to more than $4-billion (U.S.) in December from the same month in 2012, according to RBC Capital Markets analyst John Kempf. MGM has a 51-per-cent interest in MGM China Holdings Ltd., which owns the MGM Macau resort and is building another property there.

Anil Daswani, a Citigroup analyst, called 2013 a “watershed year for Macau and U.S. gaming stocks” in a report released Monday. He upgraded his price target on MGM to “buy” from “neutral” and raised his price target to $29 from $21, saying MGM is the most exposed of the U.S. gambling companies to a recovery in the Las Vegas market.

“We are becoming bullish on [Las Vegas],” wrote Mr. Daswani, who also upgraded rival Wynn Resorts Ltd. to “buy.”

MGM stock jumped nearly 3 per cent to $24.10 in early trading on the New York Stock Exchange on Monday, its highest level since the fall of 2008.

The shares hit a peak near $100 in the fall of 2007, before the financial crash, but fell below $2 in early 2009 as the company struggled to deal with its debt in the depths of the recession. After MGM refinanced its loans at lower rates, the share price staged a modest recovery and finally broke the $20 mark again last fall.

MGM’s new development in Macau and a recently approved hotel-casino in Maryland have helped fuel the stock’s gains, but a brightening outlook for Las Vegas has provided the biggest boost.

Chief executive officer Jim Murren told CNBC last week that consumers are starting to spend more on the Las Vegas strip, and said he expects a “double digit increase” in convention business. He added that the $9-billion that resort operators are spending on Las Vegas projects is “an affirmation that people see this recovery.”

Major MGM shareholders include billionaire Kirk Kerkorian and Paulson & Co. Inc., the latter of which is headed by John Paulson, also known for his bets on gold.

Bryan Maher, an analyst at Craig-Hallum Capital Group LLC, said he has “warmed up” to MGM recently, but remains cautious given the company’s “above average” leverage and what he calls a “volatile” but steadily improving U.S. gaming market.

“We believe that MGM’s recent trends of a slow Las Vegas recovery, healthy cash flow from Macau and dealing with regional gaming weakness in the U.S., will continue,” Mr. Maher said in a recent note. He warned, however, that the company still faces the risk of an economic slowdown and increased competition in Asia.

He has a $22 price target on the stock and is one of 11 analysts with a “hold” recommendation, while another 17 recommend it as a “buy,” according to Thomson Reuters I/B/E/S.

One of the “buys” is from David Bain, an analyst at Sterne, Agee & Leach, Inc., who has a $24 price target on the stock. He observes that MGM appears cheaper than rivals when evaluated on the basis of its enterprise value – the market value of all its shares plus net debt – in comparison to its earnings before interest, taxes, depreciation and amortization.

MGM has an EV/EBITDA ratio of about 12, which compares to around 14 for such competitors as Las Vegas Sands Corp. and Wynn Resorts and 16 for Melco Crown Entertainment Ltd., according to data from S&P Capital IQ. Shares in Las Vegas Sands are up 54 per cent over the past year, while Wynn Resorts is up 62 per cent and Melco Crown stock has more than doubled.

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