MGM Resorts (MGM) reported its best quarter since 2017 when releasing 2Q19 results.  For the first time since the 10/1/17 shooting at Mandalay Bay, earnings estimates are likely to move up.  Equally important, the conference call went very well.  Management was focused, detailed, and confident in its outlook.  In fact, the final analyst question concluded by noting, “answers are perfectly clear not just to my question but to all of them today.”  Beginning with the tragic shooting, MGM management has seemed off balance.  Since the shooting, five of the six quarters prior to 2Q19 saw activity level on the Las Vegas Strip slow.  Even with the hit from the shooting, this caught management and most investors by surprise given strong travel and leisure trend generally.  Besides the shooting, the China trade war has played a role as Las Vegas receives heavy visitation and baccarat play from Chinese gamblers.  Those volumes appear to have dropped by half.  MGM probably compounded the issues by reacting poorly to the Strip slowdown in terms of immediate operating strategy and guidance.

Northlake stuck with MGM even as the shares gave up about 1/3^rd of the gains it had achieved into early 2018.  We did so because we felt the sum of the parts valuation was deeply undervaluing the shares and our belief that management was good given our experience with the company prior to 2018 when the company executed beautifully on a profit improvement plan.  2Q19 results and management’s 2019 and 2020 outlook appear to be a turning point for the better.  Strip results improved and management laid out a credible outlook for sustaining the trend in 2H19 and 2020 based on a strong entertainment event calendar in Las Vegas.  As a reminder, MGM owns about 40% of the hotel room on the Strip.  Another crucial factor is that the company’s latest strategic initiative, the MGM 2020 Plan, has kicked into gear.  This plan is similar to the well-executed cost cutting plan completed in 2016 and 2017.  MGM 2020 is more balanced between cost savings and revenue initiatives and includes a strategic reorientation to cut layers of management and focus on a more entrepreneurial approach at the property level.  This is similar to the strategy used by Eldorado Resorts, a company we have had success with in the Entermedia hedge fund at Northlake’s sister company.  In concert with the 2Q19 results, management raised guidance for 2019 savings, providing important support to 2019 and 2020 earnings estimates.  Finally, MGM is coming through a period of heavy investment.  Over the past five years the company has developed major new properties in Washington, D.C., Springfield, MA, Macau, and Las Vegas.  These developments surely took a lot of management time in the aftermath of the Mandalay Bay shooting and the Strip slowdown.  Each of these developments are now ramping, albeit with inconsistent results, and the benefits to free cash flow as capital spending sharply moderates is significant.

Putting all of this together with what looks like a possible improvement in the outlook for the Strip in general leaves MGM shares poised to continue to move higher as investor confidence improves.  Looking ahead, there is a possible catalyst in the fall when the company announces the conclusion of the review of its real estate committee to monetize owned real estate on the Strip (MGM Grand, Bellagio, Aria).  Analyst estimates also could rise sharply with another quarter of good results as current consensus for 2020 EBITDAR is well below managements MGM 2020 goal of $3.6-$3.9 billion.  We see the shares having upside to $37 based on current consensus and $40 should 202o estimates move into management’s guidance range.

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.