Argus Research maintains a Hold rating on MGM Resorts International (NYSE: MGM), reflecting a balanced view of the company’s growth potential and ongoing challenges. MGM’s U.S. business is rebounding, aided by increased Las Vegas spending and expanding sports betting opportunities. However, Macau operations remain constrained due to high operating expenses, partially offsetting gains in other regions. Argus projects earnings per share (EPS) of $2.60 for 2024 and $3.00 for 2025, but advises caution due to competitive pressures and a significant debt load. Investors are encouraged to consider these factors as they weigh potential investment decisions.

Macau Performance: Challenges and Opportunities

Revenue Gains Hampered by High Costs
In Q3 2024, MGM China reported revenue growth to $929 million, up from $813 million in Q3 2023, largely driven by the removal of COVID restrictions. Despite this, Macau’s operating expenses, particularly from non-gaming shows, remained high, leading to a lower-than-expected adjusted property EBITDAR of $237 million against a consensus of $273 million. These elevated expenses pose challenges to profitability and may impact overall revenue growth in the near term.

Macau’s Strategic Importance
While operating costs remain a concern, Macau is strategically important to MGM, contributing to its revenue diversification. Continued recovery in visitation and consumer spending could eventually help stabilize the region’s performance if cost efficiencies are improved.

U.S. Growth Prospects: Las Vegas and Sports Betting

Resilience in Las Vegas Operations
Las Vegas revenue rose modestly in Q3 to $2.1 billion, with improved room revenue and non-gaming services compensating for gaming revenue fluctuations. MGM’s receipt of $37 million in business interruption insurance due to a 2023 cybersecurity incident also supported its financial position. Adjusted property EBITDAR for Las Vegas was $731 million, above the prior year’s $714 million, though slightly below the consensus estimate.

Sports Betting Expansion
The U.S. sports betting market is a growth vector for MGM, supported by increasing consumer demand. As betting becomes more mainstream across states, MGM’s established presence and partnerships offer significant opportunities, especially as consumer preferences shift toward digital gaming experiences.

Financials and Valuation: Moderate Growth and Caution

EPS Forecasts and Current Valuation
Argus projects MGM’s EPS to remain at $2.60 in 2024, with a potential increase to $3.00 in 2025, assuming stable operational performance in the U.S. and potential improvements in Macau. MGM trades at a 14.1x multiple of the 2024 EPS estimate, a reasonable valuation given its growth outlook and risks.

Debt Load and Cash Reserves
MGM’s financial strength is rated as “Medium-Low” by Argus due to its considerable debt. As of Q3 2024, the company’s long-term debt stands at $6.2 billion, with a debt/capitalization ratio of 62%, indicating leverage that may limit financial flexibility. The company has continued repurchasing shares, reducing outstanding shares from 351 million to 303 million in the past year, and improving EPS.

Long-Term Strategic Initiatives: Japan and U.S. Developments

New Casino Development in Japan
MGM’s planned entry into the Japanese market represents a strategic long-term opportunity. Japan’s gaming industry is anticipated to experience robust growth, and MGM’s early positioning may offer a foothold for capturing market share. However, significant capital expenditures and time are expected before substantial contributions to revenue.

Oakland Athletics Relocation to Las Vegas
The planned relocation of the Oakland Athletics baseball team to Las Vegas presents a potential catalyst for MGM. Increased sports and entertainment traffic in Las Vegas could drive higher occupancy rates and gaming revenue across MGM properties, further enhancing its U.S. revenue base.

Investment Risks and Considerations

Competitive Pressures and Market Risks
MGM faces substantial competition in the global gaming industry, especially in the U.S. and Macau markets, where numerous players are vying for market share. Additionally, its debt obligations could impact financial flexibility in a period of potential economic instability.

Operational Vulnerabilities
As a hospitality and gaming operator, MGM is susceptible to disruptions from global events, such as pandemics or geopolitical issues, which could significantly impact revenue and occupancy. Furthermore, an oversupply of hotel rooms and casinos in Las Vegas could intensify competition and strain profitability.

Conclusion and Investor Guidance
Argus’s Hold rating on MGM reflects its balanced outlook, with potential for steady growth in U.S. operations and emerging opportunities in sports betting and the Japanese market. However, significant debt levels and high operating costs in Macau warrant caution. Investors should carefully evaluate MGM’s ability to sustain growth while managing debt and consider the potential for market volatility impacting performance.