MGM Resorts (MGM) reported better than expected 3Q18 results driven by the company’s Las Vegas properties. The beat was at least partially due to a significant reset of expectations following a new approach to guidance by management after overpromising in 2017 and 2018 and a pessimistic outlook from analysts after a sudden slowdown in Las Vegas Strip fundamentals.  Normally, this could be viewed as spin from management but MGM shares are very sensitive to Strip performance and even bearish analyst admit there is a lot of value in the stock.  Thus, conservative guidance is helpful amid uncertainty over whether the 3Q18 slowdown on the Strip is just tough comparisons or the start of a cyclical downturn.

MGM has faced a lot of headwinds this year that should reverse in 2019.  First, the tragic shooting on 10/1/17 at Mandalay Bay has hurt performance at this important property and the impact has lingered longer than expected.  On a year over year basis, the comp eases beginning in 4Q18.  MGM is also completing a large project to rebrand its Monte Carlo property as Park MGM.  This project has taken longer and proven more disruptive than expected but should be completed by year end.  The reversal of headwinds at these two properties can drive low single digit growth in EBITDA and REVPAR for the entire corporation in 2019.  MGM should also benefit with a better event calendar in 2019, especially during the third quarter.  Events held in 3Q18 were down 20% vs an unusually strong 2017.  Analysts can already see a pickup in events in 4Q18 and early 2019 that should gain further momentum vs. the easy comp in 3Q19.

Backing out MGM’s large stakes in publicly MGM Properties and MGM China, leaves the core Las Vegas Strip and regional casino business trading at less than 8X EBITDA.  This is a large discount to other Strip operators and regional casinos on a relative basis historically.  MGM owns trophy assets like Bellagio and MGM including the real estate.  REITS focused on gaming properties trade at 12-15X EBITDA indicating further hidden value at MGM.

With business momentum improving, management showing discipline on balance sheet improvement, capital allocation favoring shareholders, and easy comps on operating fundamentals, Northlake likes the setup for MGM and sees potential for the stock to move back to the low to mid-$30s.  The primary risks are a slowdown in US economic growth and large, complex acquisition.

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.