MGM Resorts (MGM) reported pretty good 1Q18 earnings but lowered its outlook for the rest of the year based primarily on company specific factors.  The business environment in Las Vegas and Macau remains favorable and should stay that way short of a global growth slowdown or recession.  MGM’s problems are partially due to poor communication of their outlook.  This is the second time this happened in the past year, adding to our frustration.  The stock reacted sharply lower in the two days following the earnings.  We believe it now incorporates the lower outlook and a penalty for lower confidence in management.  An upcoming analyst meeting in May should allow management to restate the bull case and rebuild confidence.  We also see the company as vulnerable to an activist investor given heightened M&A activity in the gaming industry.  Thus, while we are disappointed and frustrated, we are sticking with MGM for now.

MGM’s 1Q18 results were pretty good at the property level, coming in ahead of expectations.  Corporate expenses were elevated and appear likely to stay that way.  The critical RevPAR metric fell over -4% but that was actually at the top end of guidance.  MGM is more focused on Las Vegas than other casino operators. Those operators raised expectations for MGM with strong results and commentary in the days just prior to MGM’s report.  This made MGM’s disappointing guidance especially surprising and triggered a big sell-off in the shares.

Management attributed the lowered outlook mostly to a slower than expected rebound at Mandalay Bay after the tragic shooting in October and greater and longer than expected disruption at Monte Carlo which is being completely renovated and rebranded.  The company also had some bad luck with the cancellation of a major prize fight and unusually low hold so far in April.  We can forgive these items but still call out management for poorly communicating expectations surrounding Mandalay Bay and Monte Carlo.  Unfortunately, this is the second time in the past year where management failed to communicate clearly and accurately when discussing guidance.  We are much less forgiving on this matter.

We believe that MGM has reset the bar and should achieve its new guidance.  In addition, the company has the opportunity to execute better and explain itself at its upcoming analyst meeting.  There is a great value in MGM shares which are trading at just 8X the lowered EBITDA projections when backing out the publicly traded values of MGM China and MGM Properties.  Global peers trade at 11-12X EBITDA and regional casino companies in the US trade at 8-9X.  There is an ongoing wave of M&A activity in the U.S casino industry and we see MGM as vulnerable.

The basic story of peaking capital spending and an inflection to material free cash flow is still in place.  Management was extremely chastened and apologetic on the call.  We felt they were sincere.  They are highly motivated for multiple reasons to hit their new guidance, improve communication, follow through on returning capital to shareholders, and produce positive earnings surprises.

The recovery in the shares could take time as MGM is now a “show me” story.  The first opportunity comes on May 11^th at the analyst meeting.  We are sticking with MGM at least until then.  If the story gets back on track as we expect, a return to the uppers $30s provides almost a 30% return.

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.