MGM Resorts (MGM) reported a solid quarter with sales coming in slightly below consensus estimates and earnings that beat expectations due to progress on streamlining the business. The company received a meaningful one-time benefit from the sale of The Shops at Crystals, which it owned 50% of through a joint venture in CityCenter. We believe shares of MGM can climb toward $30 as the company executes on its Profit Growth Plan.

In the Profit Growth Plan, MGM has identified several areas where they can improve profitability by restructuring the business with a focus on increasing sales and reducing expenses. As part of the restructuring efforts, MGM recently spun off a significant portion of the real estate on which its casinos sit in a publicly traded REIT, MGM Growth Properties (MGP). MGM now owns slightly over 75% of MGP. Further restructuring includes the disposition of other non-core assets such as The Shops at Crystals as MGM works to simplify its business and exit joint ventures.

Other aspects of the Profit Growth Plan include the upcoming openings of new casinos in Macau and Washington, D.C., which will serve to drive organic revenue growth. MGM will also benefit from efficiency across the organization intended to reduce expenses. In total, MGM expects the Profit Growth Plan to contribute an incremental $400 million of earnings by 2017, an increase from the previous target of $300 million.

In addition to the Profit Growth Plan, MGM’s core assets in Las Vegas and Macau have improving fundamental operating results. MGM’s operations in both downtown Las Vegas and on the Las Vegas Strip are benefiting from increased traffic and spending, partially driven by consumer travel trends as tourists’ fear of the Zika virus influences them to avoid other popular destinations such as Miami. The entire Macau market appears to be stabilizing somewhat after a rough period of traffic and profit declines driven by a Chinese government crackdown on corruption by the junket operators, which led to an exodus of wealthy VIP customers. The mass market stabilization and lapping of difficult year over year comparisons has helped to put Macau back on the path to growth.

In summary, we believe that several catalysts exist over the next two years to drive MGM shares toward our $30 target. The Profit Growth Plan will help streamline the business while increasing sales and reducing expenses. Operating fundamentals for MGM’s core assets are improving. Most importantly, we believe that the shares are mispriced when valued as a sum of the parts. For example, if you back out the market values of MGP and MGM China’s Macau operations, MGM’s other core assets are trading at a very attractive 7x 2017’s estimated EBITDA (earnings before interest, taxes, depreciation and amortization). Whichever way you look at the valuation, we believe MGM shares have substantial upside.

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 positions 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.