Sterne Agee just upgraded MGM Resorts International (NYSE:MGM) to “buy” from “neutral,” citing the company’s improving Las Vegas operations. What intrigued me the most is that the firm is valuing MGM’s Macau operations at $14, so you’re getting the Las Vegas operations for free.
We value MGM Resorts International (NYSE:MGM) China at ~$14 – leaving other EBITDA components (incl. a Strip recovery) nearly a free option at current prices. We believe MGM Grand Macau will continue to outperform other Peninsula properties given its still ramping in-house/direct VIP, new rolling program for some junket operators, recent mass floor segmentation, new database opportunities from MGM Resorts International (NYSE:MGM) hospitality and unique, fluctuating lobby attractions.
The growth engine
Without a doubt, the future for any gaming company is in China and Macau. The Chinese love to gamble and they don’t do it for fun. For them, it is a means to determine how lucky or unlucky an individual is. Gambling is looked on as a pursuit of money, not entertainment like in the U.S. Gaming revenues in Macau are five times greater than that of Las Vegas. All the serious players in gaming are there, and MGM Resorts International (NYSE:MGM) owns 51% of MGM ChinaHoldings.
MGM China owns a 35-story, 600-room casino resort in Macau. The cost to build was $1.25 billion. MGM China announced in January of this year that it won a second concession in Macau to build a new casino-resort on the Cotai Strip. This new resort will have 1,600 hotel rooms, 500 gaming tables, and 2,500 slots. The estimated cost for this new resort will be $2.5 billion.
MGM Resorts International (NYSE:MGM) China has a current market cap of $9.80 billion. Revenue last year was $2.81 billion and net income was $584.54 million. On the balance sheet, there’s $952.30 million to debt of $513.87 million.
The rest for free
Like the great lion in the MGM movies, MGM is “King of the Las Vegas Strip.” The company owns more prime properties on the Las Vegas Strip than any other company. MGM was formed when Kirk Kerkorian’s MGM bought Steve Wynn’s Mirage Resorts in 2000. The combined MGM’s properties include the MGM Resorts International (NYSE:MGM) Grand, New York-New York, Mandalay Bay, Luxor, Excalibur, Bellagio, Mirage, and Monte Carlo. The company also owns a 50% interest in CityCenter, with the Dubai government owning the other half. CityCenter has the Aria Casino and a Mandarin Oriental hotel, along with condos for sale and rent. MGM also owns the MGM Grand Detroit and Beau Rivage in Biloxi Mississippi.
By doing the math, you see where you are getting the Las Vegas properties for free. 51% of MGM China is currently valued at $4.998 billion. MGM Resorts has a current market cap of $7.76 billion on revenue of $8.87 billion. On the balance sheet, there’s $1.60 billion in cash to $13.69 billion in debt. If you take the value of MGM China plus the cash on the MGM’s balance sheet, you get $6.598 billion. That leaves all the U.S. properties. The operations in Vegas throw off more than enough cash flow to service the debt. Even if the properties in Las Vegas were liquidated, the value of the properties is more than the outstanding debt.