MGM Resorts Debt Load Could Crush The Company
Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
With MGM Resorts (NYSE: MGM) down nearly 90% from its pre-crisis highs, I decided to take a closer look into the company to see if it is now an attractive opportunity. Here are seven points I looked at while researching MGM:
Valuation: MGM’s trailing 5-year valuation metrics suggest that the stock is undervalued as all the metrics are in the lower end of their 5 year ranges. MGM’s current P/B ratio is 0.6 and it has averaged 2.1 over the past 5 years with a high of 2.6 and a low of 0.2. MGM’s current P/S ratio is 0.9 and it has averaged 1.3 over the past 5 years with a low of 0.1 and a high of 3.3. MGM’s current P/E ratio is 2.2 and it has traded between 1.7 and 30.2 over the past 5 years.
Price Target: The consensus price target for the analysts who follow MGM is $16. That is upside of about 33% from where the stock is currently at. This suggests that MGM is undervalued at these levels.
Forward Valuation: MGM is currently trading at about $12 a share and analysts expect the company to report an EPS loss of $0.39 in FY12. Revenues are projected to grow 19.3%. This seems kind of odd and probably deserves a closer look at what is happening with the company. With that, a better comparison valuation metric is probably EV/EBITDA.
EV/EBITDA: MGM is currently trading at a 13.8 EV/EBITDA ratio. Boyd Gaming (NYSE: BYD) is trading at a 9.3 EV/EBITDA ratio. Penn National Gaming (NASDAQ: PENN) is trading at a 7.2 EV/EBITDA ratio. Las Vegas Sands (NYSE: LVS) is trading at a 12.7 EV/EBITDA ratio. This metrics suggests that MGM is overvalued.
Debt: After taking a look at debt for MGM and other casinos, the valuation metrics make a lot more sense. MGM is the most levered out of the four companies. It has the most upside in a growing economy but has the most downside in a weak economy. MGM had debt of $13.5 billion at the end of last quarter and trailing twelve month EBITDA of $1.3 billion for a debt/EBITDA ratio of 10.4. BYD had debt of $3.4 billion and a trailing EBITDA of $420 million for a debt/EBITDA ratio of 8.1. PENN had debt of $1.97 billion and a trailing EBITDA of $685 million for a debt/EBITDA ratio of 2.8. LVS had debt of $9.74 billion and a trailing EBITDA of $3.1 billion for a ratio of 3.1.
Earnings Estimates: In MGM’s last quarter, the company met EPS estimates but did beat estimates the previous 3 quarters by a large margin. For example, for 2Q11, MGM reported EPS of ($0.05) versus an estimate of ($0.13), beating estimates by a whopping 61%. This suggests that analysts do not have a good grasp on the company so upside surprises may lead to share appreciation for the stock.
Price Action: The stock struggled in the first half of last year but seems to have stabilized over the last half of the year. MGM traded in a range between $12 and $16 from January to mid-August. Then it fell all the way to below $8 a share in October before recovering. It is currently trading at $12 a share, which is right next to its post-August highs. The stock crossed its 50 day moving average of $10.24 a few weeks ago and just crossed its 200 day moving average of about $12 a share. On the upside, $12.50 will serve as resistance as it has been tested four times of the past year and was crossed just once. On the downside, there is support in the $11 range followed by $9.
Conclusion: MGM is a case of a levered company being punished because of the additional risk one takes while owning MGM. I would stay away from MGM because the debt load adds an unnecessary degree of risk and look elsewhere. The valuation is very attractive though and if you have any sort of confidence in the company’s results or casinos in general, then MGM will give you the best bang for your buck return wise.
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