On the back of Omicron, MGM Resorts (MGM) shares are slightly down nearly 3% over the past three months as customer engagement, which is critical to the business, faced restrictions to curb the variant’s spread.
The business will rebound as the pandemic continues to improve towards the WHO target of a virus we will live with, causing stocks to return to the uptrend. Thus, I am bullish on this stock.
MGM Resorts International owns and operates casinos and several hotel and entertainment resorts in the United States and internationally. The portfolio includes Las Vegas strip resorts, which the company also operates.
MGM is currently pursuing an expansion strategy in Asia. The global entertainment company is a member of the S&P 500 stock market index.
Q4 Earnings
In the fourth quarter of 2021, MGM Resorts delivered earnings per share of $0.12 on higher revenue (up 105% year-over-year) of nearly $3.1 billion.
Earnings exceeded the median consensus estimate by $0.09, while revenues exceeded the median forecast by $299 million.
By business segment, revenue growth was driven by impressive Las Vegas Strips growth of 277% year-over-year, while regional activities grew 51% year-over-year. Activities in China saw modest year-over-year growth of 3%.
EBITDAR steadily improved and was $821.4 million in the fourth quarter of 2021 compared to $97.3 million in the fourth quarter of 2020.
During the quarter in question, MGM committed $727 million to repurchase its own stock and retired 17 million shares at an average share price of $42.42. As of December 31, 2021, $1.3 billion of shares remained outstanding to be repurchased by the company.
Outlook
A study conducted by researchers at the La Jolla Institute for Immunology in San Diego, California, in collaboration with some Italian research centers, recently concluded that variants, including Omicron, do not penetrate the protection offered by all available vaccines even six months after vaccination.
This represents an important step in the fight against the pandemic as it reinforces optimistic expectations of finally overcoming the health crisis caused by the COVID-19 virus. Less stringent constraints are needed to limit potential new variants, so activities like MGM that rely heavily on customer presence could be given a chance.
For MGM, this means more certainty on its growth projects to deliver higher profitability and improved free cash flow to continue funding its expansion in Asia and restore its pre-pandemic dividend. As a result, MGM shares will have a positive impact.
MGM has cut its dividend to shareholders significantly (down 98% from $0.15 per share pre-pandemic to $0.003 per share in December) to conserve cash and make its balance sheet more resilient to the impact of the crisis.
The latest quarterly report shows that things are getting back to normal on the earnings side, the basis for dividend payments.
Financial Condition
As of December 31, 2021, the company had $4.7 billion in cash on hand with total debt of ~$24.6 billion.
The discrepancy wouldn’t be an issue if MGM weren’t struggling to pay the interest cost on the debt. Unfortunately, the interest coverage ratio of 0.7 (which should be at least 1.5) currently says the opposite from this perspective. However, there is scope because things can get better.
Wall Street’s Take
In the past three months, 11 Wall Street analysts have issued a 12-month price target for MGM. The company has a Moderate Buy consensus rating, based on six Buy, five Hold, and zero Sell ratings.
The average MGM Resorts price target is $57.91, implying 30.6% upside potential.
Conclusion
Without the pandemic, this stock would have grown steadily. The company weathered the strongest headwinds of the pandemic and should not collapse now that the worst is over. The recovery gains certainty as the variants are less hostile. Activities like MGM that depend on customer involvement will benefit. This will put the stock back into an uptrend mode.
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