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Will MGM Recover in the Markets?

June 8
11:24 PM 2017

Will MGM Recover in the Markets?

Some gambling brands transcend the industry to gain widespread name recognition, even amongst non-gamblers. MGM is surely one of them. The company, behind resorts like the MGM Grand and the Bellagio in Vegas, is one of the biggest operators of casino resorts worldwide. But Q4 results from 2016 showed a stark downturn in their fortunes, wiping some 5% off the value of the company. This has set analysts reeling, as they try to figure out whether MGM could recover lost ground, or whether this marks a start of a more concerning trend for the company.

Could MGM, a giant of the industry, be set for a downward slide? What would this mean for the sector? Or is the company well placed to bounce back in the months to come? Let's take a look at what's going on behind the numbers.
What's Going On At MGM?
MGM Resorts International has holdings worldwide, with some of the biggest casino resorts to its name. It's Las Vegas operation saw some signs of growth, with hotel bookings substantially up on the reporting period. But overall, revenue took a hit, missing the expectation of $2.25 billion, with $2.19 billion reported over the period.

It's clear from the figures that MGM Resorts International is by no means in dire straights, and it remains a very strong player in the industry. But with investors rattled by the poor earnings results, its share price took an unexpected beating. Whereas analysts had expected earnings in the region of 8 cents per share, this figure was adjusted downwards to a loss of 1 cent per share.

Part of the problem lies with the company's Macau resorts, which are continuing to suffer from weaker gambling activity than has previously been the case. While its business stateside seems to be fairing well, particularly in Vegas, its Asian resorts have been struggling to keep up with the pace. MGM has seen a 31% decline in its gambling revenues from Macau, and despite being less exposed to the Macau market, has lost more heavily than its rivals in the region.

The Macau Problem

Macau has long been one of the world's primary destinations for international gamblers. Like Vegas in the US, Macao is very much the east's home of gambling. Yet for the last two years, this traditionally strong market has seen revenues fixed on a rapidly declining trajectory.

In 2014, monthly gambling revenues in Macau were approaching $40 billion. By January 2016, that had fallen to under $20 billion. This declined forced MGM to take a $1.5 billion charge, reflecting the loss in value on its Macau holdings. It has also been pressured into delaying the launch of its new resort in the market, a new $3 billion site that had been scheduled to open at the end of 2016.

Fortunately, the downward pressure seems to be easing slightly on the Macau market, and revenue figures are now starting to level out. So does this mean there's a route back to the giddy heights of stock value for MGM?

The Road to Recovery

Fortunately, conditions for a rebound do look favourable. The decline in the Macau market, responsible in large part for the weaker performance, seems to have abated for the time being. Figures are now levelling off, and while revenues are still far below their previous peaks, it looks like the decline, at least for the time being, has been arrested.

The company also has the launch of their new resort in the region. While this is arguably not the best time to be further exposing the company to the Chinese gambling market, it is nevertheless likely to have a positive impact on earnings coming in the following quarters and beyond.

Further, MGM is now in the fortunate position of having resorts spread globally, which should help counteract any persistent weakness in their Asian markets. Las Vegas performance was up, albeit not significantly enough to offset the damage from Macau. As it moves forward from the Q4 results, more growth in other areas of the business, combined with the new resort launch and the seemingly more settled Macau market, could spell a return to their previous strength.

They are also looking to take advantage of the online market by partnering with GVC Holdings the company behind successful online casinos such as party casino. GVC will be providing support and software services that will power MGM Grand Resorts online casino portal with the state of New Jersey.

Time will tell whether the recent MGM slide was a temporary blip, or a sign of things to come for the company. While the imminent future still remains uncertain, many analysts are now expecting MGM is well-positioned to capitalise on other opportunities throughout their business, on the road to recovery for their share price.

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