The Only Reason This Stock Has a Buy Rating Is Its Momentum... Is It Worth Holding? Leading entertainment company MGM Resorts (MGM) has been witnessing a significant surge in its stock price, with more than 30% gain year-to-date. However, will it be able to sustain this...
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Leading entertainment company MGM Resorts (MGM) has been witnessing a significant surge in its stock price, with more than 30% gain year-to-date. However, will it be able to sustain this momentum? Let's find out.
Casino company MGM Resorts International (MGM) has been on a bullish trend, with shares soaring 42.8% over the past nine months and 33.9% year-to-date to close the last trading session at $44.75. Moreover, the stock is currently trading above its 50-day and 200-day moving averages of $43.36 and $36.89, indicating an uptrend.
Additionally, the company saw strong growth in the fourth quarter of 2022, with significant revenue and earnings increases. The company has also been focused on generating free cash flow and increasing shareholders' returns, backed by its share buyback programs.
Therefore, I think the stock could be an ideal investment, and let's dive deep into the factors that could influence the performance of MGM in the near future:
Expansion in Japan
MGM recently announced that the Ministry of Land, Infrastructure, Transport and Tourism in Japan has officially certified the Area Development Plan submitted by Osaka Prefecture/City and by Osaka IR KK, a joint venture between MGM Resorts Japan and ORIX Corporation (IX).
This certification is one of the final steps in the licensing process under Japan's Integrated Resort Development Act, paving the way for MGM Resorts and ORIX to finalize agreements with Osaka Prefecture/City on the construction of a new approximately $10 billion development project.
The proposed development in Osaka aims to bring a world-class resort experience to the city and transform the region into one of the world's top entertainment and hospitality destinations, serving as a hub for tourism across Japan.
Growth In The Previous Quarter
During the fiscal fourth quarter that ended December 2022, MGM's Las Vegas properties saw a significant increase in revenue and a new record for adjusted property earnings, driven by solid visitation and entertainment offerings.
The company reported consolidated net revenues of $3.60 billion, indicating an increase of 18% compared to the prior-year quarter. Net income attributable to MGM rose 116.8% year-over-year to $284 million, while the EPS grew 200% from the prior-year quarter to $0.69.
Return to Shareholders
In the fourth quarter of 2022, the company repurchased 11 million shares of its common stock for $352 million under the March 2022 repurchase plan, leaving $475 million available. Also, in February 2023, the Board of Directors approved a new $2 billion share repurchase plan and suspended regular dividends to prioritize share buybacks.
Favorable Analyst Estimates
Analysts expect MGM's revenue for the fiscal first quarter that ended March 2023 to come in at $3.61 billion, indicating an increase of 26.5% from the prior-year quarter. The company's EPS for the same quarter is expected to increase significantly year-over-year to $0.16.
Its revenue is expected to rise 10.4% year-over-year to $3.60 billion for the fiscal second quarter ending June 2023. Its EPS estimate of $0.15 for the same quarter indicates a 397.4% rise compared to the prior-year quarter.
Moreover, the company has surpassed the consensus revenue estimates in each of the trailing four quarters, which is impressive.
Mixed Profitability
MGM's trailing-12-month EBITDA margin of 13.51% is 18% higher than the 14.44% industry average. Also, its trailing-12-month net income margin of 11.26% is 154.4% higher than the industry average of 4.43%. MGM's trailing-12-month levered FCF margin of 12.38% is 478.7% higher than the industry average of 2.14%
However, its trailing-12-month negative EBIT margin of 13.11% is significantly lower than the 7.79% industry average. Further, the stock's trailing-12-month ROTA of 3.22% Is 17.7% lower than the industry average of 3.92. Its 0.30x trailing-12-month asset turnover ratio is 70.9% lower than the industry average of 1.04x.
POWR Ratings Reflect Promise
MGM has an overall rating of B, translating to a Buy in our POWR Ratings system. The POWR Ratings are calculated by accounting for 118 distinct factors, with each factor weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. MGM has a B grade for Momentum, in sync with its excellent price performance over the past months.
It has a C grade in Quality, in sync with its mixed profit margins. MGM is ranked #10 out of 29 stocks in the Entertainment - Casinos/Gambling industry.
In addition to the POWR Ratings stated above, we have also given MGM grades for Value, Growth, Sentiment, and Stability. Get access to all MGM ratings here.
Bottom Line
MGM ended 2022 with an exceptional performance. Moreover, the company is optimistic about its future prospects, with solid business momentum driven by several factors, including a busy domestic events calendar, MGM China's quick return to profitability, and BetMGM's continued improvement.
Moreover, the company's expansion plans in Japan and its share repurchases drive its positive outlook for 2023. Therefore, I think the stock is a solid buy.
How Does MGM Resorts International (MGM) Stack Up Against Its Peers?
While MGM has an overall POWR Rating of B, one might consider looking at its industry peers, International Game Technology PLC (IGT), Accel Entertainment, Inc. (ACEL), and PlayAGS, Inc. (AGS), which have an overall A rating (Strong Buy).
Discover 10 widely held stocks that our proprietary model shows have tremendous downside potential. Please make sure none of these "death trap" stocks are lurking in your portfolio:
MGM shares were unchanged in premarket trading Tuesday. Year-to-date, MGM has gained 33.46%, versus a 8.31% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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