MGM Resorts (MGM) reported 4Q17 results in line with to slightly better than expectations.  Due to a variety of factors including poorly communicated guidance in 2016, a delayed opening for the company’s new casino in Macau, the tragic shooting at Mandalay Bay on October 1^st, a shift in metrics away from industry standard revpar, and a few new hotel/casino project announcements by competitors, MGM shares have not fully participated in the stock market rally.  Investors were tense heading into the 4Q17 results and 2018 guidance with bulls and bears both on edge.

They key items in the report were a -4.9% decline in revpar, just slightly ahead of -5% to -7% guidance, 1Q18 guidance for revpar to fall -2% to -4%, and 2018 revpar to rise 2% to 4%.  Also, 1Q18 margins will soften by a higher than expected 250 basis points.  All this news kept the bull vs. bear battle intact but the company did well on its conference call explaining the guidance and especially stating the bull case for Las Vegas and the company.

Northlake’s updated view on MGM remains very positive and we think the shares can rise to the low $40s assuming guidance is reached and there are no unexpected macro pressures.

Rather than give clients the usual quarterly recap, we thought we would share the views of Kevin Fitzpatrick, a colleague who works at Gabelli & Company.  Kevin knows the MGM story well and talks to lots of different investors about the company.  He kindly shared the comments and allowed us to reproduce them.  Kevin’s thoughts capture Northlake’s thinking well after the least earnings report and conference call.

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The past two calls, ever since Murren (MGM CEO James Murren) miscommunicated the weakness of Q2’17, have been really good. Typically, any company I follow with an ex-Wall Street/ex sell side guy running the company knows what to say.

I liked a few things about the call:

1.)   MGM is focused on reasons to come to LV, rather than places to stay. Raiders Stadium (NFL, Bowl Games, World Cup)

2.)   Convention Center Expansion

3.)   MSG Sphere (could be cool)

4.)   T-Mobile Arena (Golden Knights are 1^st place in their division, Basketball – NBA Summer League, Boxing)

5.)   Interstate 11 Project (AZ visitation)

As we know some new supply is coming to Las Vegas, but bringing something different to the market, which should help overall visitation

1.)   Resorts World LV (Asian visitors)

2.)   Wynn Paradise Park (big visitor draw)

All of this ties in nicely with our investment thesis which remains even more true after the past Q:

1.)   Profit focus: Improved analytics capabilities are enabling management to focus on maximizing total profit per occupied room rather than simply room rates (revpar).

2.)   Cotai: We do not believe that the property is fully reflected in MGM China’s valuation.

3.)   Free Cash Flow: We expect free cash flow generation to accelerate dramatically heading into 2019.

4.)   Undervalued: Core MGM valuation remains discounted relative to peers and historical transaction multiples.

5.)   Strip Renovation Opportunities: we see opportunity for high-ROI capital investment into MGM’s south-Strip.

I think this is the year for MGM to really outperform.

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Thanks, Kevin!  Here at Northlake, we could not agree more!

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.