MGM Resorts (MGM) reported disappointing fourth quarter results. The miss was partially self-inflicted; previous guidance from MGM warned about a difficult year-over-year fourth quarter comparison but neglected to mention the potential impact from a shift in the timing of Jewish holidays. A related timing shift by one large convention group impacted fourth quarter EBITDA by nearly $20m, or about half of the overall EBITDA miss. Additionally, operating margin flow-through was below expectations after continually surprising to the upside for several quarters. While it is understandable that the stock pulled back in response to the report, Northlake’s long-term thesis remains intact. Sales and profit margins should continue to grow at least throughout 2017, albeit at a slower pace than investors were previously expecting. Northlake believes MGM can trade into the mid-$30’s despite the reduced growth expectations and will continue to hold the stock.

Positives from the quarter include continued progress on the Profit Growth Plan (PGP) and the initiation of paying a quarterly dividend to shareholders. MGM expects to achieve the full $400m run-rate of incremental cash flow from the PGP in the first half of 2017, earlier than the initially targeted end of 2017. MGM also signaled that the PGP will provide further benefits beyond the initial $400m, although the extent of those incremental benefits may be less than some investors initially expected. The initiation of the dividend reflects an inflection point of free cash flow generation and debt reduction for MGM, as well as an ongoing commitment to return capital to shareholders. Even with a comparable yield to many lodging and gaming peers, MGM has left themselves room to balance between growing the dividend, continuing to reduce debt, and reinvesting in growing the business. Additional capital will likely be returned to shareholders after subsidiaries including City Center and MGM China transfer cash back to the parent company.

MGM has delayed the opening of their new resort in Cotai until sometime in 2017 while they work with the government to finalize project details. The delay has created additional expenses and uncertainty, but an upcoming board meeting in March should provide more detail for investors.

MGM’s 2017 outlook for Las Vegas appears solid. Despite another difficult comparison in the third quarter, RevPAR and profit margins are expected to grow each quarter throughout the year. Leisure and business travel should remain strong as consumers continue to spend on experiences instead of products. MGM already has 90% of its convention business booked for the year, and is increasingly focused on driving total group spend on food, beverages, and gaming.

The recently acquired Borgata and the newly opened National Harbor are both performing well so far. MGM said that National Harbor has been capacity constrained on the weekends, implying strong consumer interest. MGM plans to roll out a new regional marketing campaign once National Harbor is included in the M Life rewards program, which should help boost both properties traffic in the coming quarters.

In summary, the disappointing quarter from MGM led the stock to pullback as growth expectations were reset. The combination of poorly anticipated and communicated guidance from MGM along with a stretch of surprisingly strong quarters allowed investors’ expectations to run ahead of the actual results. However, even after this reset, Northlake believes the fundamentals are still on track and continues to hold MGM with a target price in the mid-$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.