HEDGEYE EDGE
MGM’s quarterly print might not be good enough for the market today, but it’s plenty good for those willing to zoom out a bit and focus on the key drivers. Indeed, at the B&M property level, MGM put up a healthy beat on top and bottom line, with the combo of Las Vegas and Macau beating expectations by 5-6%. Don’t get us wrong, this quarter wasn’t without faults, but as we shift our focus exclusively to the core growth drivers and the setup for ’24, we remain encouraged. For both Las Vegas and Macau, the Q4 print, and commentary provide us additional confidence that ’24 numbers need to move a good bit higher. Higher numbers support our view for a higher (much higher) stock price. MGM remains a Best Idea Long.
q4 review
A perfect quarter Q4 was not… but there was more than enough here to satisfy the key tenets to our Long thesis on MGM – Las Vegas and Macau are rolling right now. Ultimately, that’s where we see the biggest delta in our model vs Street and over the long term, those are the segments that will move the needle most for MGM.
Negatives on the Q4… The obvious negatives were in the Regional markets and Other segments which represent a combined ~25% of EBITDAR. Other segments, including BetMGM can shift quarter to quarter and are of little consequence to the model looking out into the NTM. As for Regionals, the company put up a spotty quarter on margins and EBITDAR with revenues coming virtually in-line, but the OpEx line coming in heavier than modeled. Cause for concern? Given that MGM’s Regional portfolio generates <25% of the company EBITDAR and decidedly less of the company value, we’re less concerned. Some one-time events in their markets clearly impacted flow through to a larger degree than modeled by us and the Street. We see stability in the Regional portfolio to pair with our expectations of growth in the broader portfolio.
Positives on the Q4… The obvious positives were in the areas where MGM put up its largest beats – Las Vegas and Macau. Sure, we could nitpick about flow through not coming in stronger in Macau or how reinvestment rates (aka Gaming promos) were higher in Las Vegas, but the reality is, both segments handily beat consensus expectations. In Macau, MGM Cotai drove the beat with exceptional performance across the premium segments. While the Street continues to model share degradation, MGM China continues to deliver, and comments suggest that streak is continuing in the new year. In Las Vegas, Gaming trends might have taken focus on the print, but the real story was on the hotel and non-gaming side, highlighted by better-than-expected ADR and RevPAR growth that accelerated from the prior quarter. WYNN clearly stole the show in Q4 (thanks, F1), but MGM wasn’t that far behind. Back out the benefits of higher hold (hard to do given elevated comps) and the company still would have beat by 2-3% in Las Vegas. Either way, EBITDAR in the combined Macau and Las Vegas regions beat by 5-6% vs the Street that had been raising numbers into the print. Furthermore, the EBITDAR generated from those segments was up ~37% YoY. Forward looking commentary provided by management suggests both segments should continue to perform. As of this AM it would appear the Street has not yet fully reflected the upside potential.
OUTLOOK & CATALYSTS BY MARKET
As mentioned, the Q4 print was a little hairy but there was more here for the bulls than the bears. Beats in the core growth driving markets and positive near term commentary outlooks are more than reason to keep us in the bull camp on MGM. By market, we see a healthy setup here for MGM that should bridge them to YoY EBITDAR growth and importantly ahead of current consensus. It might take some time for it to be reflected in the stock, but patience could pay off here.
In Regionals, given our more optimistic view of the GGR backdrop in the Regionals see (HERE and HERE), we see some modest upside for numbers. At minimum, we expect stability, and the optics around top line growth could be beneficial for sentiment. For MGM, Q4 was soft due to some one-time pressures, but results should improve from here. Not a central tenet to our bull thesis, but the headwind currently perceived, either.
In Las Vegas, the key comments that stood out to us were “low to mid-single digit OpEx growth”, “mid-30%’s margins” and an overall expectation for EBITDAR growth. The cost and margin comments could be debated as “in line” with consensus, but the expectation for EBITDAR growth was not expected and is still not expected as of this AM by the Street. Given our view that the top line backdrop – mainly driven by MSD RevPAR growth – we viewed the OpEx commentary as incremental to our bullish view and could offer upside to our already Street-high estimates. Gaming just needs to hang in there on a net basis (currently expecting zero growth in ’24) but if we’re right on RevPAR (as we have been in past years and quarters), we see upside to Strip EBITDAR that should drive company EBITDAR. Our latest detailed note on Las Vegas (see HERE), dives into all the drivers of the Las Vegas top line story.
In Macau, flow through might not have been as robust as modeled by us or the Street, but market share was higher and thus, EBITDA higher. Odds that continues? Well, we’re not extrapolating ~20% market share from January moving ahead through the year, but we think MGM can keep its beat streak alive. Based on our scan of estimates, the Street continues to bake in added normalization of market shares, without fully crediting MGM Cotai for correcting their pre-Covid mistakes and building in a dominant resort. For now, Macau seems in good standing and as the market continues to recover (CNY off to a strong start), MGM should maintain more than its fair share. Macau overall seems underappreciated by the market, but MGM China’s position therein seems even more underappreciated.
CONCLUSIONS | MGM = BEST IDEA LONG
If you want negatives, MGM is probably going to give one or two things to pick at each quarter across its vast enterprise, but the reality is, for segments and areas of real consequence, there’s a lot to like here. The expectations game will be played today but with the current low valuation, we’re not concerned. The outlook for Macau has only improved and the market is still in explosive recovery mode while MGM is taking a disproportionate share of the industry’s growth and driving solid EBITDA. In Las Vegas, margins might step back a bit this year, but EBITDAR should grow, which is not yet reflected in estimates. Regionals will continue to be a source of FCF and stability (Q4 should be the bottom). Elsewhere, BetMGM’s lackluster performance appears more than discounted in the stock and given the well documented push for “reinvestment” in ’24, we view the segment as more neutral to MGM. Japan, Dubai, and New York aren’t reflected in the stock either, but they are growth investment opportunities that more investors could eventually begin to pencil in.
Our initial scan of overnight estimate changes suggests the Street is raising estimates, but they likely won’t go high enough. That’s ok, we don’t mind. Until our market view changes on both Macau and Las Vegas, we’ll keep pushing this one until the numbers match reality and the valuation matches the catalysts and sustainability of the new MGM. Regardless of framework, MGM’s stock remains cheap on absolute and relative basis. We value the core B&M business at 55 which would be good for ~25% upside from current. In addition to the core, we layer in a modest value for BetMGM and Japan to derive a total SOTP of 70, which implies nearly 60% upside from current. Management’s approach to valuation and SOTP can be debated, but the reality is, they’re buying back a lot of stock, and for good reason.
