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Morningstar | MGM Moving Past Vegas Headwinds, But Into Macau Cyclical Risk; Shares Undervalued

While Vegas' (50% of revenue) temporary headwinds (event calendar and Park renovation) are subsiding as expected, Macau's (20% of revenue) cyclical risk is increasing, while MGM's Cotai property still experiences some ramp-up pains ahead of VIP club openings. As a result, we may adjust our $37.50 valuation down $0.50-$1 to account for Macau cyclical risk by pushing our existing 2020-21 modeled downturn forward into 2019. Additionally, we plan to adjust our MGM Cotai near-term forecast down slightly, which will be offset by stronger performance of the new Springfield resort and long-term opportunity around sports betting. While tough Macau industry gaming comparisons and cyclical risk remain near-term headwinds, we see an attractive margin of safety developing for long-term investors.

Vegas revPAR decreased 3.9% in the quarter, ahead of the 5%-7% drop MGM guided for, as a softer convention calendar temporarily created competitive discounting to fill rooms with lower margin leisure travelers. Additionally, renovation disruption at MGM Park contributed to the 419 basis point Las Vegas EBITDA margin drop to 28.9% (ahead of MGM's 28% guidance). Encouragingly, Park development is set to be complete by the end of this year, which we believe will allow MGM to resume Las Vegas EBITDA margin expansion of 80 basis points in 2019. We don't plan any change to our 2018 Las Vegas forecast, as year-to-date revenue and EBITDA margins as tracking in line with our 2.5% decline and 30% respective estimates.

Macau revenue grew 37% in the quarter, benefiting from the Cotai property opening in February. But the new resort's third-quarter revenue is annualizing at only $688 million, below our 2018 sales forecast $870 million, which we plan to adjust lower, despite upcoming high-end areas opening the next few months.

MGM's new Springfield resort (opened Aug. 24) is performing well with $42 million in third-quarter revenue. And although we expect some drop off in demand after the excitement of the new opening, we still plan to adjust our existing 2018 $75 million estimate toward $100 million.

Finally, as substantiated in our October 2018 report "World's Next Large Integrated Resort Opportunity on the Horizon," we continue to see MGM as well positioned to win the Yokohama license in Japan, an opportunity representing $11.4 billion in total revenue when opened in 2026.