GS ended up on the right side of the MGM stock call but the analysis was full of holes.
Fitting perfectly in the apples vs. oranges category, Goldman Sachs made an aggressive buy call on MGM based in part to the valuation discrepancy between LVS/WYNN and MGM. No I’m not kidding. That’s like buying a bottle of Riunite because it’s cheaper than a 1997 Brunello (with no sales or alcohol tax!). Sure Bellagio is a great asset but how can one compare EV/EBITDA multiples of Excalibur/Monte Carlo/Circus squared etc. operating in the highest corporate income tax jurisdiction (USA) vs Wynn Macau/Venetian Macau paying no income taxes on gaming profits?
At 9x leverage, the MGM equity is essentially a call option. MGM the company is back to being a domestic gaming company and should be valued as such. Despite management’s attempt to position it as a “Convention Company”, it is not. Convention rooms booked represent 11% of total and rates are so low that the casino business drives most of the profits. It is clear that MGM never became a hotel company, a brand company, an international company, etc., or the past iterations. Back to basics fellas.
Our point in this note is not just to trash Goldman Sachs. The point is that MGM’s stock is on a tear and some of that is based on faulty analysis. MGM’s stock may continue to run but at least investors should be focused on the right issues and not on the company trading at Macau/Singapore multiples.
Here are some assertions from the Goldman Sachs report and our commentary:
“New analysis shows MGM shares undervalued relative to its peers”
- In other words, using the inflated values of other companies to justify ‘buy rating’
“Las Vegas operation for Las Vegas Sands is trading at a seven point premium to MGM shares on 2011 estimates (LVS 16X EBITDA, vs. MGM 10X). We arrived at this by backing out the Macau portion using the current stock price of Sands China and then applying a Genting Singapore multiple to our 2011 Marina Bay Sands EBITDA estimates.”
- Well, he’s using an 11x multiple for Singapore which is too low in our opinion and hence he’s getting a much higher implied value for Vegas. We have Singapore & US at an implied multiple of 14.8x but there is no question that Singapore deserves a much higher multiple than Vegas. Another issue with this valuation is making the statement that MGM’s Vegas business should trade at the same multiple as LVS’s. LVS has two nice 5 star properties – MGM has Bellagio and 50% of Aria and a bunch of impaired assets that are never going to fully recover. We know that those assets wouldn’t trade for more than 8x – since we have the TI comp (sold last year) which is a better asset than Excalibur/Circus Circus/Monte Carlo.
- You can pull out Singapore if you want and try to isolate it, but a few points. Singapore should have a huge ramp in earnings over several years, operates in a duopoly market, and it’s a pristine trophy asset. Moreover, the corporate income tax rate in Singapore and Macau is so much lower than in the US so if you use EV/EBITDA, that should account for 3-4 multiple points. I can see someone saying 15x on it easily for 2011 EBITDA which should grow double digits for years to come. Singapore will be over 60% of the “Singapore / Vegas” EBITDA as well so if you put an 11x multiple on it – of course you get a huge Vegas number.
“Carrying out the same analysis for Wynn’s Las Vegas operations, we find that again MGM shares are trading at a discount (WYNN 15X 2010 EBITDA vs. MGM 10X). Again we are not sure if this calculation truly reflects what investors really believe Wynn Vegas assets are worth but even if the discount was “discounted,” MGM shares are trading well below other Vegas assets.”
- We actually have WYNN Vegas at 16x 2011 – but maybe our numbers are too conservative. Again, it’s like valuing a Porsche and a Toyota – you can’t compare Wynn’s 2 top notch assets to MGM’s portfolio. WYNN also has a pristine balance sheet – while MGM has a load of debt issues down the road. WYNN also pays special dividends while, with MGM you face the risk of being diluted in an equity offering.
“We could argue that MGM, with the dominant position on the Vegas Strip, might merit a premium to the other companies’ Vegas operations given the value that dominance in a city can create. We also admit that MGM’s balance sheet and exposure to currently weak Las Vegas could make some investors hesitant, but the discount is so significant it suggests MGM shares are undervalued from a relative value basis.”
- Yea you can argue that but it’s kind of a silly argument when you compare their real estate to WYNN or LVS. Sorry but there is no way anyone pays the same multiple for Monte Carlo/Excalibur/New York NY/ Circus Circus/ etc as they would for Venetian. Cross marketing on the Strip has not helped those properties much or at least you wouldn’t know it from the numbers.
“We would also point out that MGM trades at a big discount to other hotel companies. Starwood, Marriott and Hyatt all trade at 12X to 13X 2011E EBITDA. Even with Vegas oversupply issues, financial leverage and concentrated market it appears to us that MGM is one of the least expensive ways to invest in a strong business and leisure travel rebound.”
- Yeah and if my Aunt was a man he’d be my Uncle. The fact is those hotel companies have very modest leverage, are diversified, and control supply. They also generate much more business from convention and business travelers (which GS is very high on) than MGM. This is almost like saying if Riunite wasn’t such a bad wine it would be more expensive. Those are real issues for MGM that the hotel companies don’t have.
“Macau IPO seems to moving along …Regarding Macau, the company stated in its 4Q2009 earnings conference call the following regarding its JV in Macau: ‘Our partner and we are very engaged in this and we think going public makes sense, and we have been always articulating the fact that we'd like to go public by midyear.’ Additionally, just last week news sources reported that MGM has hired five banks to manage a planned $500 million Hong Kong listing. This implies a 14X multiple on our 2010E EBITDA, which would be roughly in line with where Las Vegas Sands (Sands China) and Wynn (Wynn Macau) Hong Kong listings initially priced last Fall.”
- We don’t think MGM deserves the same multiple: 1) only a short and poor track record, 2) it’s a JV, 3) no visibility on when asset #2 will come along, and 4) all the investigations.
“…As does the sale of The Borgata...
In Atlantic City, MGM also owns 50% of Borgata and on March 12, 2010 put its stake into a Divestiture Trust to be sold within the next 30 months. Borgata’s peers – the regional operators – are trading at an average 2010E EV/EBITDA multiple of 9X. We forecast The Borgata to generate 2010 EBITDA of $182 million. Borgata EBITDA peaked in 2005 at $252 million. The Borgata joint venture currently has $586 million of net debt. Using the average peer multiple and our forecasted EBITDA (discounted to account for the impact of table games coming online in Pennsylvania) would suggest a value of $1.6 billion.”
- A forced seller of a non-controlling/managing stake? We’re going to go out on a limb and say they won’t get a good multiple here. Oh, and AC is being squeezed by competition on all sides with no signs of abating. Where do I put my bid?
“CityCenter JV has monetization opportunities...
MGM may also look to monetize its stake in the CityCenter joint venture of which it owns 50%. Options include increasing leverage (current debt levels at $1.8 billion), selling a hotel/condo tower, or selling the retail.
While the main Aria hotel tower (4,000 rooms) is likely to remain at the joint venture, the venture could explore selling one of the other towers such as the 400-room Mandarin Oriental or the 1500 room Vdara. With the economic slowdown, transactions within the hotel space have understandably been very limited. However, there were some transactions in 2009 among which include the St. Regis Monarch Beach $245 million acquisition ($612,500 price/room), the Hyatt Regency Boston’s $133 million acquisition ($226,900 price/room) and the W San Francisco’s $90 million acquisition ($222,770 price/room). The second option for CityCenter could be to increase the leverage on the property. With $1.8 billion in debt and an estimated $400 million in EBITDA for 2010, the property could potentially take on more debt, possibly up to a 6X level.”
- If they do $400MM in 2010 that will be a heroic act – we’ll take the under on that bet (but only in Vegas because gambling is illegal in CT). Don’t forget that they spent well north of the quoted per key rates above in building these wonderful rooms. Small point but Harmon isn’t even finished yet and that’s because it costs more to complete than what they can “monetize” this “hidden” asset for.