Should We Take a Gamble on This Casino?

Margie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Let’s take a look at the casino industry and give a laser like focused look at MGM Resorts (NYSE: MGM) At the Motley Fool, we call this analysis- “the SWOT.”

Strengths

  • A globally recognized brand.  Other hospitality companies have paid for the use of its name/ MGM's help in managing.
  • Owns the Bellagio hotel casino in Las Vegas, which will never go out of style. 
  • Nevada Senator and majority leader Harry Reid is firmly in the company's and the casinos industries corner.  Any online poker regulation passed on his watch will include provisions making it necessary to partner with the land based casino players, a political giveaway to his home state.  Unfair?  Absolutely, but Reid will be at it for another four years.
  • Generating good profits out of Macao, an expanding in the city.

Weaknesses

  • With the exception of equal to the where they sold Treasure Island hotel casino in Las Vegas, and an accounting charge in their favor in Macao, the company has last money every single quarter for the last several years. 
  • Management- financed and completed City Center Las Vegas at exactly the wrong time, during the financial crisis.  They have taken tremendous write-downs in losses in regards to it.
  • DEBT- Additionally, the company borrowed vast amounts of money for City Center.  The company's debt currently stands near $14 billion.  It is very difficult to generate free cash flow when you are paying off enormous amounts of interest every quarter, not to mention when the bonds come due.
  • Has a huge bet on the Las Vegas market which has not performed well at all in recent years. 
  • Compared to Wynn Resorts (NASDAQ: WYNN) and Las Vegas Sands (NYSE: LVS) , it has very little exposure to Asia which is where gambling revenues are truly growing.

Opportunities

  • Is constructing a new hotel in Macao.  Based on the fact that most Chinese citizens have not even ever visited the city, this leaves tremendous room for growth.
  • China is gaining strength economically.  The Chinese sparkling truly known to be voracious gamblers, therefore much of that newfound wealth will find its way into Macao.
  • Online poker- the company has formed a deal with Party Poker to market to U.S. players once the game becomes legal in the United States.  As Barrack Obama has been re-elected president this is a much more likely to take place then if Romney had been elected.  Based on their high amount of casino square footage in the United States, and their name brand, the company will be able to leverage this into high margin revenues.
  • In terms of Asia, MGM is also expanding to Vietnam.

Threats

  • The company's overhang of debt threatens to envelop it.  If not for a last minute save, workers would've walked away from the city center project leaving it incomplete.
  • Weak economic outlook for the United States.
  • CEO Jim Murren has directly correlated housing prices into how well Las Vegas does.  The overhang of foreclosures not on the market will likely send housing prices back down when they are released.
  • Regulations on the casino industry growing more strict regarding problem gambling.

Bottom Line

Do you really want to invest in a company that loses money quarter after quarter?  That will have difficulty financing its debt?  I don't care what type of song and dance CEO Jim Murren does at the annual meetings, there are better places to put your money.


margiecfl has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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