MGM Resorts Stock Dinged by Morgan Stanley Downgrade, Price Target Cut Ahead of Second-Quarter Earnings Report

Posted on: July 18, 2019, 11:00h. 

Last updated on: July 18, 2019, 10:48h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

Shares of MGM Resorts International (NYSE:MGM) were slightly lower in midday trading Thursday after Morgan Stanley downgraded the stock and lowered its price target on the casino operator.

MGM Resorts CEO Jim Murren may face some tough questions on the company’s July 25 earnings call. (Image: CNBC)

In a note out earlier today, Morgan Stanley gaming and leisure analyst Thomas Allen lowered his rating on MGM to “equal-weight” from “outperform” while modestly paring his price target on the stock to $31 from $32. Those revisions come a week before MGM Resorts is scheduled to deliver second-quarter earnings on July 25 after the close of US markets.

Among other issues, the Morgan Stanley analyst is concerned about slumping baccarat revenue and sluggishness at some of MGM’s newer gaming venues.

While some of the 2Q issues are transitory, we are concerned that weaker Vegas baccarat trends and lower returns on new properties will continue,” said Allen in the note.

A recent run of good fortune by baccarat players on the Las Vegas Strip has been cited as one reason for a dip in gross gaming revenue (GGR) there, indicating MGM is not the only operator to be stung by some bad luck with the popular table game.

Allen estimates MGM’s baccarat revenue plunged 55 percent in May.

Earnings Outlook

MGM Resorts, the operator of the Bellagio and the Mirage on the Strip, is expected to post second-quarter earnings of 25 cents a share. If met, that result would be a four percent decline from the year-earlier period. Analysts are expecting the gaming company to report revenue of $3.24 billion for the April through June period, a 13.3 percent increase on a year-over-year basis.

Analysts covering MGM have not made any earnings revisions over the past month. One thing investors will want to watch for is if the company says it took any charges related to recent round of layoffs as part of the MGM 2020 cost-cutting initiative. In an effort to reduce expenses by $100 million this year and by another $200 million by 2021, MGM has laid off more than 1,000 workers this year.

The bulk of those layoffs occurred in April and May. Sometimes, companies take charges associated with lowering headcount. If MGM says it did that, it is likely the company will report two earnings per share (EPS) figures – one that factors in the impairments and one that does not. The latter is more relevant to investors because the charges are one-off events, not reoccuring themes.

Other Areas Of Concern

Allen expressed concern that MGM’s Las Vegas, Macau and domestic regional properties lagged expectations in the second quarter. The analyst may be onto something there. As just one example, MGM Springfield, the company’s Massachusetts casino, had a June GGR decline of 10.5 percent, its second-worst month since opening in August 2018.

In Macau, “channel checks suggest that MGM suffered from low hold and MGM Cotai is ramping more slowly than expected,” said the Morgan Stanley analyst.

Every analyst covering MGM has the equivalent of a “buy” or “hold” rating on the stock. Allen’s “equal-weight” grade is akin to a “hold,” but his $31 price target on the casino operator is slightly below the Wall Street consensus of $33. The stock trades around $28.80 as of this writing.