Casino stocks have fallen in 2022 amid record inflation and growing fears of a recession. These macroeconomic headwinds, which tend to be associated with lower consumer discretionary spending, fueled a sell-off at all major casinos and games. shares.
The screenshot below, which shows the performance of key stocks in the sector, illustrates how well the sector has fared. MGM Resorts International (NYSE: MGM) and Wynn Resorts Ltd (WYNN) are each down more than 30% year-to-date, Caesars Entertainment Inc (CZR) is down more than 60%, while DraftKings (DKNG), which operates a digital sports betting platform, is down more than 50%.
Exposure to China was another major headwind for MGM, WYNN and CZR. All of them are present in the Macau gambling hotspot in China. Lockdowns and travel restrictions are still being actively implemented in China as part of the government’s zero covid policy. This has resulted in lower visitor numbers and a consequent drop in revenue for resort and casino operators in Macau, including MGM, WYNN and CZR.
Amid these challenges, it can be tempting for investors considering casino stocks to sit on the sidelines and wait for a positive shift in sentiment. In some situations, this is the safest and smartest decision to make. However, this is not one of those scenarios. There is an exciting opportunity to profit by initiating a long position in MGM, which stands out as the best bet against its peers, WYNN and CZR, as well as other new digital entrants like DKNG.
Solid turnover and profitability
MGM’s fiscal 2022 revenue is on track to surpass 2019 levels. That means the company has weathered the pandemic-induced downturn — something peers like WYNN have yet to do. WYNN is a smaller company today (from a revenue standpoint) than it was before the pandemic.
Another point to consider is MGM’s superior profitability compared to its peers. For starters, it’s the only profitable player, which is a crucial consideration for investors in a rising interest rate environment.
It should be noted that MGM is not only profitable, but has grown its margins over the past few years despite the headwinds the wider industry has faced with Covid and the challenging macro environment.
MGM’s gross profit margin (TTM) is 48.68%, compared to a five-year average of 42.94%. Its EBITDA margin (TTM) stands at 18.57% against a five-year average of 14.35%. CZR did not experience significant improvement in profitability while WYNN experienced deterioration in profitability.
MGM looks set to maintain its strong margin performance if you zoom in on second quarter earnings. “Our second quarter results represented our highest adjusted EBITDAR quarter in Las Vegas history, both on an absolute and same-store basis,” CEO Bill Hornbuckle said on the earnings call.
If you look at its second quarter earnings presentation, you’ll find an interesting insight that speaks to MGM’s potential to continue to deliver strong financial performance. This is his performance in China.
In the second quarter, net revenue for MGM’s China unit was only 20% of revenue in the second quarter of 2019. Business in China has contracted significantly due to the zero covid policy. This is a huge opportunity in terms of future earnings potential and stock price movement.
Why is this an opportunity and not a risk? Although the zero covid policy is ready to continue, it will not stay in place indefinitely because the government will at some point have to declare “victory” over the pandemic. Macau will return. MGM, with a 14% market share in China according to its second quarter earnings presentation, is well positioned to take advantage when that happens. The reopening in China will boost its already impressive and profitable financial performance.
Management favorable to shareholders
MGM also has a shareholder-friendly management team. There are several indicators of this. The most obvious is its stock buyback program. “Since the start of 2021, through last night, we have repurchased 104 million shares for $4 billion, or 31% of our market capitalization. This activity brings our countdown to approximately 393 million shares,” CEO Bill said on the second quarter earnings call.
The other less obvious but equally important indicator of MGM’s shareholder-friendly management is the smart investments it makes to grow the business. MGM has been selective about the partnerships it establishes to develop its sports betting and iGaming offerings. The same cannot be said for the majority of companies venturing into space.
Many gaming companies are eroding shareholder value in search of growth opportunities in mobile sports betting and iGaming. They spend too much money on marketing for promotions and discounts to acquire disloyal customers who are spoiled for choice. DKNG is the best example. DKNG has a negative EBITDA margin of 99.56%, underscoring the unsustainable cash burn of the Cathie Woods-backed sports betting company. This atrocious margin essentially means that its operations lose a dollar for every dollar it generates from customers – which is hardly sustainable.
MGM’s iGaming and sports betting efforts are held within BetMGM, which is a 50-50 joint venture with Entain. This model spreads the risks and costs associated with venturing into sports betting and iGaming. It also brings in an experienced and formidable partner in the form of Entain, which is a FTSE 100 company. In progress. According February data from Eilers & Krejcik, just behind FanDuel and ahead of DKNG. The fact that he has built this strong presence in online gaming without eroding shareholder value is impressive.
MGM has been able to attract quality shareholders, underscoring the confidence that management has built in the investment world. IAC Inc (IAC) has been buying back shares since early 2020. The company led by Barry Diller in August had a 16.5% stake.
MGM’s EV/EBITDA (FWD) is 12.10x. That of WYNN, on the other hand, is 20.09x and that of CZR is 10x. MGM is cheap considering that its peers are currently profitless and that its 5-year average EV/EBITDA is 26.28x.
The main risk to watch is a recession. Although the casino CEOs have in recent months played down fears of a recession, investors need to be prepared, however, as business leaders are pressured to show confidence and strength. In the event of a recession, the risk of a sector sell-off causing MGM to fall cannot be ruled out. We believe, however, that the stock is a fundamentally-driven buy and view any short to medium-term pullback as a discount to Mr. Market.