Despite Improving Odds, MGM Isn't the Best Bet

We don’t expect any significant change to our $29 fair value estimate after no-moat

MGM’s 2016 total sales growth of 9% matched our forecast, while adjusted EBITDA of $2.58 billion was slightly above our $2.54 billion estimate. Looking to 2017, it is encouraging that the company expects Las Vegas (64% of total EBITDA) growth in revenue per available room of 4%-5%, well above the 1%-2% growth we expect in the overall U.S. market. MGM is benefiting from accelerating convention activity and its new entertainment center. In fact, MGM already has 90% of its convention space booked for this year. Additionally, MGM expects 7% revPAR growth this quarter, despite going against 8% growth the previous year; this 15% two-year stacked growth would represent its strongest level ever. As a result, we may lift our 2017 Vegas sales growth forecast toward 4% from 2.5%, while maintaining our 2018-25 low-single-digit annual sales growth and EBITDA margins of 33% in 2025 from 29% in 2016.

Macau (20% of total EBITDA) posted a 13% decline in 2016 revenue (in line with our estimate) with a 4% decline in adjusted EBITDA (6% decline). We don’t expect to alter our 2017-25 MGM Macau forecast of 9% annual sales growth with EBITDA margins expanding to 27.5% in 2025 from 27% in 2016. Still, we continued to see signs of near-term stabilization in the Macau region and think MGM stands to participate as the region’s growth increases with the opening of key infrastructure projects in 2018 and 2019. Also, MGM's new casino opens in Cotai later this year, which we believe will provide a market share boost this year and next.

Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.