MGM Resorts (MGM) reported strong 2Q17 results with better than expected profitability. Management executed well against long term plans to continuously improve profit margins, overcoming a self-imposed headwind from lower hotel room revenue and a slightly unlucky quarter at the casino tables. The investment thesis remains on track with several catalysts expected to drive shares higher in coming quarters, such as asset sales, new resort openings, debt reduction, and increased capital return to shareholders.
2Q17 shed light on part of MGM’s strategy to improve overall resort profitability. Instead of focusing solely on maximizing revenue per available room (RevPAR), MGM is taking a more holistic approach by encouraging a shift to more profitable revenue streams such as restaurants and other non-gaming spending. Since MGM is in the early stages of this new approach, investors were surprised to see weaker than expected RevPAR growth. However, the new strategy allowed MGM to deliver better than expected overall profits, validating the new strategy.
MGM has two resorts under construction; MGM Cotai is expected to open later this year, while MGM Springfield is slated to open in mid to late 2018. As each project nears completion, capital expenditures will sharply decline and MGM will allocate capital toward paying down debt, increasing dividends, and share repurchases. Another potential use of excess capital could be building a resort in Japan, but there are legislative and competitive hurdles to clear before that becomes reality.
The recently opened MGM National Harbor near Washington D.C. and recently acquired Borgata in Atlantic City both continue to perform well. Management stated that discussions with MGM Growth Properties (MGP) about a transaction for National Harbor’s real estate will likely begin soon now that the resort has been operating for a few quarters. Additionally, MGM is exploring other non-core asset sales such as their stake in CityCenter.
Looking forward, we expect the upcoming Mayweather-McGregor fight and the start of the inaugural season for the Las Vegas Golden Knights National Hockey League team will contribute to a strong back half of 2017. The opening of MGM Cotai, continued growth in profits and margins, and asset transactions described above should help push MGM toward the upper-$30’s.
MGM is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake’s regulatory filings can be found at www.sec.gov. MGM is a net long position in the Entermedia Funds. Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.