HEDGEYE EDGE
MGM’s stock looks really cheap. Is it because of the cyber attack, the union uncertainty, or BetMGM market share? Or maybe it’s more about the core fundamentals – cost creep and the peak leisure narrative? Probably some combination of the above and while MGM didn’t remove all the overhangs in one fell swoop, investors should feel better about all of them. The cyber attack impact is rear view, and a union settlement was reached earlier this AM (see HERE). The other negative narratives will take some time to dispel but there was progress. Q3 results and management’s outlook suggest continues strength in leisure (and group) demand while margins were pretty decent. Finally, BetMGM’s market share has been stable for almost a year, but it may take a few quarters and surviving the ESPNBet launch for the investment community to underwrite share sustainability.
Overall, our positive investment thesis seems to be very much intact. And it’s not just operations, capital deployment also seems to be well placed. MGM significantly outpaced buyback expectations in the quarter and maintains several long term investment opportunities. As noted, the stock looks inexpensive with catalysts and remains a Hedgeye Best Idea Long.
MOVING ON & AWAY FROM THE NARRATIVES
MGM’s domestic markets have enjoyed a robust top line recovery, margin improvements, market share gains, and more. So now with the perception of macro working against the GLL landscape, MGM may have become a victim of its prior success. The good news, however, is that the barrage of overhangs that have plagued the stock appear to be either rear view or in the process of being rear view. The cyber attack and union issues are essentially issues no more. The “peak leisure” narrative and worries about cost creep may not have been completely dispelled but progress was made in Q3 and Q4 to date.
MGM mostly beat the Street in its markets after adjusting for the Q3 disruption. Importantly, the Q4-TD performance both in Las Vegas and Macau suggests the company is in a great spot to keep building on its EBITDAR base. On the part of management, actions speak volumes… an aggressive buyback that could get more aggressive with the stock down here tells us all we need to know.
LAS VEGAS STRIP – TRENDING HIGHER; TAILWINd TO MGM
Outside of a few pockets of optimism this year, the sentiment around the Strip and MGM’s stock has been neutral to outright negative. Sure, there was a soft spot in late Q2, but we’d think sentiment would improve on the back of the market reaccelerating. No such luck, though. At least not yet, but perhaps that changes in the coming weeks as the Las Vegas Strip market continues to distance itself from other hotel markets. With the market blowing through big October comps, catalysts in place on the convention and leisure demand side, we expect weekly hotel updates to provide a solid catalyst for the market.
Even under conservative assumptions, especially on the gaming side, we see the Las Vegas Strip handily beating expectations in Q4, largely owing to October’s LDD YoY growth. We’ll hold off on a full deep dive of ’24, but our numbers on ’24 remain comfortably above the Street which continues to overestimate “normalization” in Las Vegas and seems to be downplaying the magnitude of next year’s convention and group infusion, the Super Bowl, a full international return, and the potential for Far East gaming to gradually return. Management did their best to point out the positives for the NTM, but it might take some time for investors to digest and truly compare the Strip to what’s out there. This is not just a ’23 story.
MACAU – SHARE GAINS HOLDING
Owing to the Cyber attack impacts on the domestic business, MGM China stole the Q3 show both for MGM’s results and versus the competition in Macau. Las Vegas certainly drives the ship for MGM, but we continue to remind investors that MGM China’s growing Macau position is a big driver that needs more credit. Gone are the days of MSD to HSD market share of GGR or EBITDA. MGM China is on pace to do >$1Bn in annual EBITDA, which is up ~40% vs pre-Covid.
As a reminder, our thesis on MGM in Macau centers around the sustainability of recent market share gains, at least relative to Street expectations. MGM’s share took off in Q1 as the market began its recovery but Q2 and Q3 prove that these early share gains aren’t just a fleeting moment in time. There’s more at play here including a natural ramp at MGM Cotai that was only in the middle innings when Covid hit, the availability of product, the improving mix of suite product, and more. The Street missed this phenomenon and will continue to raise estimates, but likely not enough. MGM beat by ~7% in Q3 EBITDAR and that’s after an even bigger set of beats in 1H’23.
Regarding market share, yes, we expect it to moderate in the coming quarters but to a far lesser degree than consensus is still expecting – at least as of this AM. Our revised numbers now reflect higher market share than before, sizable growth in their share gaining Mass GGR base, and a gradual ramp in margins toward ~30%. The chart below reflects some updated data on market share from an EBITDA perspective…the Street is not giving MGM China enough respect.
Unlike others, MGM China was lagging peers in 2019 and its new Cotai property was not ramping fast enough, which makes for an easier base to compare against. We see potential for solid growth off the base. Street numbers are nowhere near where they need to be, but they should drift higher either today or in the near future.
outlook – BEST IDEA LONG
Fears around the domestic leisure and gaming customer – right or wrong – might continue to dominate the near term narrative, but our view of MGM’s end markets remains unchanged. Regionals will face cost pressures but should be able to hold the line and meet the consensus bar. Meanwhile, Las Vegas should have enough incremental revenue to leverage some of its unavoidable cost increases. Outperforming RevPAR growth should drive the story in Las Vegas, and we see plenty of potential. In Macau, we think MGM is building something special and it might not make the highlight reel but the march towards $1Bn in EBITDAR should very much be on investor’s radars.
Regardless of framework, MGM’s stock is cheap on absolute and relative basis, and importantly, holds a steady catalyst calendar. Reasonable valuation toggles, and update “parts” for our SOTP imply a nearly ~$70 stock or greater than 70%+ upside from last night’s close. Excluding BetMGM and future development, our SOTP math shows a $52 stock, good for 30%+ upside from last night's close.
