MGM Resorts International (NYSE:MGM) stock is getting some help today from a Goldman Sachs upgrade.
Las Vegas Review-Journal)
The venerable Wall Street bank raised its rating on the Mandalay Bay operator to “neutral” from “sell” while lifting its price target on the gaming company to $43, implying upside of about nine percent from current levels.
We also upgrade MGM to Neutral from Sell following the recent pullback and as stronger market share in Online sports betting/iGaming and a faster rebound in Vegas more than offset our concerns about the relative pace of recover,” according to report issued by Goldman Sachs.
The bank downgraded MGM to “sell” last September, citing what it expected to be a sluggish recovery from the coronavirus pandemic in Las Vegas. However, the combination of government stimulus checks and pent-up demand is proving fruitful for Sin City and the domestic casino hub’s rebound trajectory is surprisingly robust, proving naysayers wrong. That’s vital to the MGM investment thesis because the company is the largest Strip operator.
Inside Goldman MGM Rating
While Goldman Sachs acknowledges MGM saw an 11 percent increase in gaming revenue in May on a hold-adjusted basis, the bank also pointed to weakness in Macau.
MGM’s MGM China unit runs two integrated resorts in the world’s largest gaming hub and recovery there has been painfully slow. July gross gaming revenue (GGR) looks to be heading in the right direction, but a recent increase in COVID-19 case counts in mainland China coupled with a still lacking travel bubble with Hong Kong are hampering the near-term outlook. Goldman says the Macau exposure keeps it from raising MGM to a “buy” rating.
Goldman did, however, boost its earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) while highlighting the operator’s iGaming and online sports wagering footprint by way of its BetMGM unit.
BetMGM, a 50/50 joint venture with UK-based Entain, is the number three online sportsbook operator in the US, but it’s rapidly accumulating market share and posing a significant threat to DraftKings for the second spot. In the higher margin online casino space, BetMGM is one of the dominant players in each of the states in which the platform is available.
Goldman Mentions MGM Capital Return Plans
Goldman also highlighted potential for MGM to return capital to shareholders. At the height of the coronavirus pandemic last year, the Bellagio operator scrapped a share repurchase program and slashed its annual dividend to a hardly noticeable one cent a share.
At the end of the first quarter, it had $6.2 billion in cash on hand and total liquidity of $9.7 billion. That makes it one of the most cash-rich companies in the industry, and it has levers to raise more capital if needed.
The company is continuing its asset-light quest, recently announcing sale-leaseback deals for the Aria and Vdara on the Strip, but it hasn’t publicly discussed plans to boost its dividend or elevate share buybacks.