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Morningstar | No-Moat MGM Vegas Headwinds Should Prove Temporary; Shares Undervalued

We plan to reduce our no-moat MGM $39.50 fair value estimate $1-$2 to account for lower 2018 Las Vegas results and a slightly slower ramp at the new Macau Cotai property, leaving shares undervalued.

Vegas (55% of EBITDA) second-quarter revenue per available room growth of 2.8% was at the upper end of 1%-3% guidance, despite the renovation disruption at Park MGM (property currently producing negative EBITDA), which is expected to continue through 2018. That said, MGM confirmed recent commentary given by Caesar and Wynn that the Strip has seen a weaker event calendar stoke pricing pressure, which should prove temporary. Still, MGM guided third-quarter and full-year Vegas revPAR to decline 5%-7% and a low-single-digit percentage, respectively, and we plan to adjust our 2018 Las Vegas sales forecast to down low-single digits from up 1.5% in our existing model. Like its peers, MGM gave constructive commentary on 2019 demand, saying production for all future periods was up double digits. As a result, we don't plan to alter our long-term Vegas sales forecast of low-single digit annual growth.

MGM's new Macau property, Cotai (around 3% of total EBITDA), is ramping slightly slower than expected, with its first full quarter of operation annualizing sales at around $740 million, tracking below our $870 million 2018 forecast. Still, we predict that lower hold might have reduced Cotai sales around $30 million in the quarter, and MGM is on track to open high-end rooms and gaming areas later this year. Additionally, MGM mentioned that its Peninsula property saw 20% gaming revenue growth in the month of July (ahead of the 10% lift seen in the industry), which we think bodes well for its Cotai property. As a result, we plan just a slightly lower 2018 Cotai sales forecast (to around $825 million). Meanwhile, Cotai EBITDA margins of 10.9% were also likely hurt by lower hold, although we view our mid-20% forecast for the year as now being a few percentage points too high.

We reiterate our view laid out last year in a report titled "The Rising Sun Will Shine Bright on Japanese Integrated Resorts" that MGM will win one of two urban gaming licenses we expect to be awarded. This stance is based on MGM's strong resort experience in Las Vegas, as well as a healthy track record with dealing with partners (we believe Japan will require all operators to partner with local businesses).