MGM Resorts (MGM) reported its best quarter in a strong run of growth for the company and upside surprises to Wall Street estimates.  When Northlake bought MGM for clients earlier this year, our investment thesis was based on strong management, unappreciated strength in Las Vegas, upside at soon to open regional gaming properties in the U.S., consistently strong management execution, and an attractive sum of the parts valuation.  Following the 3Q16 report, each aspect of the investment thesis remains firmly in place.  We are sticking with MGM and see upside to the mid-$30s looking out to the end of 2017.  Catalysts to achieve this target include opening of the new casinos in Washington DC and Springfield, MA, further stability and modest improvement in Macau, continued strength in Las Vegas, additional upside from the company’s Profit Growth Plan, and further portfolio restructuring to realize shareholder value.

Even adjusting for a couple of favorable one-time items, MGM’s 3Q16 results were very good. On a same store basis, revenues at the domestic casinos and resorts rose 7%.  Gaming volumes were good but the big upside came from an 11% increase in REVPAR in Las Vegas.  The excellent revenue trends drove margin expansion which received a further kick from the company’s Profit Growth Plan.  This plan, a combination of revenue initiatives and cost savings, has met its goal of $400 million well ahead of schedule.  Management was unwilling to up its target but spoke confidently of further improvements ahead.  All financial metrics reported by MGM easily exceeded Wall Street estimates

It is too early for management to provide guidance for 2017 but there was a discussion of group trends looking good for 2017 and optimism that REVPAR gains can be in the mid-single digits next year.  These general comments should be well received.  2017 also will see the opening or first full year of results at new resorts in Macau, Washing DC, and Springfield.  New openings can be tricky given pre-opening costs and needed management and marketing resources.  We are confident that the excellent and detail-oriented MGM team is up to the task.

As long as Northlake remains comfortable with the outlook for Las Vegas, stability or slight growth in Macau, and reasonable domestic regional gaming trends, the unique drivers of the MGM story should shine.  In 2017, we could see the company find more ways to realize value from its portfolio of assets as D.C. at least is sold to sister company MGM Properties with MGM retaining the operating profit after paying rent to to MGP.  Actions like this plus continued growth at all existing properties can drive MGM shares to our mid-$30s target price over the next year.

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.