EUR 850.00 For Business Accounts Only

Morningstar | No-Moat MGM Posts Solid 4Q As Headwinds Wane; Shares Undervalued

We may lift our $37 no-moat MGM valuation around $1 to reflect stronger Las Vegas and regional business, while the company's Macau revenue rebounded after opening new VIP play rooms, in line with our expectations. We see shares as undervalued.

Las Vegas (49% of 2018 sales) revPAR rebounded to 8.2% growth in the fourth quarter from a 3.9% drop in the previous quarter, with EBITDA margins jumping 222 basis points to 29.1%, as headwinds (renovation disruption at MGM Park, terror attacks, and convention calendar) waned. The improvement in the quarter drove the region's 2018 sales to a 0.5% drop, ahead of our 2.5% decline estimate, with EBITDA margins ending at 29.8% versus our 30% estimate.

Meanwhile, Macau (21% of 2018 sales) fourth-quarter revenue also rebounded, as its Cotai property posted $275 million in sales versus $172 million in the prior quarter, as it opened additional VIP rooms, allowing total MGM Macau revenue to grow 33% versus the 9% lift in industry gaming growth. This improvement was generally in line with our model, as 2018 Macau revenue grew 32% versus our 35% forecast with EBITDA of $568 million versus our $565 million estimate.

Regional properties (30% of 2018 sales) general posted solid results, as witnessed by its two newest properties, National Harbor, which posted 2018 revenue of $801 million versus our $789 million estimate, and Springfield with its $120 million in 2018 sales versus our $100 million forecast.

In total, 2018 revenue and EBITDA finished up 9% and 1%, respectively, ahead of our 7% growth and 2% drop expectation. MGM didn't quantify any 2019 guidance, but mentioned that street consensus estimates appear reasonable, which our forecasts are near.

MGM maintained its 2020 profit target of driving EBITDA growth of $300 million across its domestic resorts (U.S. properties are nearly 80% of 2018 estimated total EBITDA) by the end of 2021. We have confidence MGM can achieve these profit initiative goals, given the company surpassed its last profit initiative target announced August 2015 to reach $300 million in incremental EBITDA by year-end 2017, as it garnered around $450 million over that time frame. However, we had already incorporated a similar level of improvement in our model, and as such, we plan to maintain our forecast for $333 million in domestic EBITDA lift from year-end 2018 through 2021.

The recent profit initiatives build on MGM's first profit growth plan, or PGP, which began to leverage industry best practices throughout its domestic properties. Initially, MGM targeted $300 million in EBITDA improvement from PGP by the end of 2017, but increased it to $400 million in June 2016, and announced at the May 2018 investor day that PGP had achieved around $500 million in EBITDA improvement. This continued improvement supports our view that MGM can achieve its 2021 improvement targets through innovation, brand marketing, asset renovation, and investment in talent.