Decisive Partnerships And Luxury Focus Propel Company's Growth And Diversify Revenue Streams

Key Takeaways

• Strategic partnerships and luxury investments in Las Vegas are poised to enhance MGM Resorts International's revenue and net margins by attracting premium clientele.
  
• Expansions in Asia-Pacific and focused free cash flow growth strategies aim to significantly increase net income and shareholder value through market share and operational optimizations.
  
• Diverse challenges including market softness, luxury market risks, hefty capital investments, digital venture profitability, and external operational threats could pressure MGM's financial performance.

Catalysts

Through its subsidiaries, owns and operates casino, hotel, and entertainment resorts in the United States and internationally.

• MGM Resorts International's strategic relationship with Marriott contributes to its performance, driving higher rates and occupancy, which impacts revenue and net margins positively.
  
• Investments in luxury resorts and room remodels, particularly in Las Vegas, focus on profitable growth areas, likely increasing top-line growth and improving net margins by attracting higher-paying guests.
  
• The integration of the Cosmopolitan of Las Vegas into the MGM Rewards program enhances customer loyalty and incremental revenue growth, potentially impacting overall revenue positively.
  
• MGM China's significant year-over-year growth in net revenues and market share, accompanied by strategic balance sheet strengthening, indicates potential for further revenue and EBITDAR growth in the Asia-Pacific region.
  
• Free cash flow growth strategy, through operational optimizations, market share growth in Las Vegas, expansions like in New York, and dividend growth from MGM China, aims for a mid-teens free cash flow per share compound annual growth rate, which will impact net income and shareholder value positively.

Assumptions

• Analysts are assuming MGM Resorts International's revenue will grow by 2.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 5.2% today to 6.3% in 3 years time.
• Analysts expect earnings to reach $1.2 billion (and earnings per share of $4.3) by about September 2027, up from $880.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $1.3 billion in earnings, and the most bearish expecting $743.0 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.6x on those 2027 earnings, up from 12.1x today. This future PE is lower than the current PE for the US Hospitality industry at 19.5x.
• Analysts expect the number of shares outstanding to decline by 13.43% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 10.74%, as per the Simply Wall St company report.

Risks

• The potential for Formula 1 showing some softness in terms of occupancy and booking rates for their Las Vegas properties could impact their revenue targets and overall financial performance in the fourth quarter.
  
• MGM’s focus on the high-end market and luxury offerings, while potentially lucrative, risks alienating or failing to capture broader market segments, impacting revenue diversity and growth.
  
• The emphasis on major capital investments and renovations, such as the $1 billion spent on luxury properties and planned expansions, presents a risk if the expected returns in terms of increased occupancy, rates, and gaming spend do not materialize, impacting net margins.
  
• The digital ventures and investment in the iGaming and sports betting platforms, while holding long-term growth prospects, poses near to medium-term risks in terms of reaching profitability thresholds and expected market share, particularly with the mixed performance in BetMGM’s investments.
  
• The regional and Macau operations face potential headwinds from economic factors, competition, and regulatory changes that could affect MGM’s market share and margins, highlighting operational and market risks external to their control.

Valuation

• The analysts have a consensus price target of $54.27 for MGM Resorts International based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $63.0, and the most bearish reporting a price target of just $41.91.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $18.2 billion, earnings will come to $1.2 billion, and it would be trading on a PE ratio of 12.6x, assuming you use a discount rate of 10.7%.
• Given the current share price of $35.01, the analyst's price target of $54.27 is 35.5% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.