On the surface, MGM Resorts (MGM) reported 1Q19 results in line with Wall Street expectations.  However, the composition of the results is troubling investors.  Regional casinos in the US did well.  Macau showed hoped for improvement assisted by high hold at the tables.  Las Vegas fell short on EBITDA.  Given that the narrative on MGM shares largely surrounds Las Vegas, the stock is reacting negatively to this mix of results.

Northlake sees little change to the long-term thesis and found 1Q19 results to be largely as expected and, importantly, as signaled by management on last quarter’s call.  In other words, nothing has changed.  A pick up is still expected in Las Vegas in 2H19 driven by a strong convention and entertainment calendar and the ramp at Park MGM which only fully reopened in late December.  The company’s new 2020 initiatives are progressing as planned with management commentary and the financial details provided so far at least on target with guidance for 2020 and beyond.  The company’s heavy investment period is in the rearview mirror with the openings at Park MGM, Springfield, MA, and MGM Cotai.  Leverage is coming down, free cash flow is growing, and the potential accretive monetization of the company’s valuable Las Vegas real estate is “months, not quarters” away.

Despite Northlake’s positive and unchanged view of MGM, we understand the decline in the stock today.  Management has had a tough time executing consistently since late 2017.  Part of it is beyond their control given the horrific tragedy at Mandalay Bay on 10/1/17.  Part of it is poor guidance communication.  Part of it is inconsistent month to month trends on the Strip.  Another factor is the trade war with China and close proximity of the Super Bowl with Chinese New Year hurt Asian visitation from high rollers against a tough, hold-fueled 1Q18 comparison.  Finally, investors have been frustrated with the slow ramp at new properties in Macau, Springfield, and Park MGM in Las Vegas.

The weaker than expected results on the Strip in 1Q19, hold benefits in Macau, and still slow improvement in Springfield left open several of these questions.  On the other hand, management correctly called out the Strip shortfall from baccarat and noted confidently that ex-baccarat the Strip performed well with growth in gross gaming revenue and lodging RevPar.  In addition, management used the quarterly call to provide greater detail on the 2020 initiatives including initial cost savings estimates, headcount reductions, and specific examples of plans to centralize key functions from the individual property level to the corporate level to improve efficiency and offer revenue upside.

We have been as critical of management as anyone but found the tone on the 1Q19 call to be a notable improvement.  Management is well aware they they have a credibility issue and we do not believe they would have been so confident on the call without good reason. Furthermore, there is a strong parallel between the highly successful Profit Growth Plan management implemented several years ago and the 2020 plan.  This gives us confidence that the forecasted 2H19 improvement on the Strip and the 2020 guidance will occur.  We see trends in Las Vegas as stable as long as the economy holds firm, which is our forecast.  We also see recent investments in Las Vegas in convention space, professional sports, and an entertainment venue as supporting the Strip’s economy.

The wait has proven longer than expected but we think the payoff for MGM happens over the next 18 months.  We stick with our target in the low to mid-$30s based on a sum of the parts methodology.

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.