Since the tragic shooting at Mandalay Bay in October 2017, MGM Resorts (MGM) has posted inconsistent results at its Las Vegas properties.  There has been a lingering impact in Las Vegas generally and at MGM’s southern Strip properties in particular.  The results have also bounced around due to the Las Vegas convention and entertainment calendar and erratic visitation related to the economic environment.  Finally, the trade war with China has significantly slowed visits from big spending Chinese gamblers.

Over the last few quarters, MGM seems to have gotten their arms around the various headwinds and the company has posted inline results with optimistic commentary on the forward outlook.  The 3Q19 report was the best since the shooting and the outlook on the Strip for 4Q19 and 2020 is promising.  We believe this will lead to a payoff for MGM shareholders as the company executes on its 2020 profit improvement plan, monetizes its valuable real estate in Las Vegas, reduces its debt load dramatically, and buys back stock.

Importantly, the improved financial profile is being driven by a simplification of MGM’s corporate structure to an asset light strategy where the company operates its wide array of casinos, hotels, resorts, and entertainment properties but does not have capital tied up in real estate.  This strategy is similar to what Marriott and Hilton have done in lodging and those stocks have received premium valuations and performed very well.

The parallel is not perfect as MGM’s integrated casino and hotel properties require much higher capital spending to sustain their competitive position.  Furthermore, the company earns profits as an operator rather than through management fees paid by franchisees.  Nonetheless, as an operator of integrated casino resorts around the world with a moderate debt level, MGM shares should achieve a much improved valuation over the next few years.

In addition, the low debt insulates the company should cyclical weakness impact Las Vegas and domestic regional casinos while also setting the company up if it wins a license to build an integrated resort in Osaka, Japan.  Another growth opportunity exists as sports betting goes national in the United States.  MGM has positioned itself in a leadership position through partnerships with professional sports leagues and sports betting dedicated companies.

We see a series of catalysts ahead including (1) continued improved performance on the Strip and in the company’s regional casinos, (2) executing on the 2020 profit improvement plan, (3) monetizing additional real estate assets, (4) simplification of the company’s complex corporate structure, and (5) debt reduction and share buybacks.  Upside to the mid $30s in 2020 is likely as investor confidence grows when MGM executes on each of these initiatives and the valuation on the company’s core domestic cash flow expands.

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.