Resorts & Casinos company MGM Resorts International stunned Wall Street today as it plummeted to $34.28, marking a 0.2% change compared to the S&P 500 and the Nasdaq indices, which logged 0.2% and -0.2% respectively. MGM is -31.77% below its average analyst target price of $50.24, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, MGM Resorts International has lagged behind the S&P 500 by -5.7%, moving -23.6%.
MGM Resorts International's trailing 12 month P/E ratio is 11.3, based on its trailing Eps of $3.03. The company has a forward P/E ratio of 42.3 according to its forward Eps of $0.81 -- which is an estimate of what its earnings will look like in the next quarter. As of the third quarter of 2022, the average Price to Earnings (P/E) ratio of US consumer cyclical companies is 24.11, and the S&P 500 average is 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
The main limitation with P/E ratios is that they don't take into account the growth of earnings. This means that a company with a higher than average P/E ratio may still be undervalued if it has high projected earnings growth. Conversely, a company with a low P/E ratio may not present a good value proposition if its projected earnings are stagnant.
When we divide MGM Resorts International's P/E ratio by its projected 5 year earnings growth rate, we obtain its Price to Earnings Growth (PEG) ratio of -0.18. Since a PEG ratio of 1 or less may indicate that the company's valuation is proportionate to its growth potential, we see here that investors are undervaluing MGM's growth potential .
An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of MGM Resorts International's gross profit margin trends:
| Date Reported | Revenue ($) | Cost of Revenue ($) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | 9,680,140,000 | 5,030,609,000 | 48.03 | 45.06 |
| 2020-12-31 | 5,162,082,000 | 3,452,711,000 | 33.11 | -19.36 |
| 2019-12-31 | 12,899,672,000 | 7,603,489,000 | 41.06 | -0.29 |
| 2018-12-31 | 11,763,096,000 | 6,918,875,000 | 41.18 | n/a |
- Average gross margin: 40.8%
- Average gross margin growth rate: 8.5%
- Coefficient of variability (lower numbers indicating more stability): 14.9%
We can see from the above that MGM Resorts International's gross margins are very strong. Potential investors in the stock will want to determine what factors, if any, could derail this attractive growth story.
MGM Resorts International's financial viability can also be assessed through a review of its free cash flow trends. Free cash flow refers to its operating cash flows minues its capital expenditures, which are expenses related to the maintenance of fixed assets such as land, infrastructure, and equipment. Over the last four years, the trends have been as follows:
| Date Reported | Cash Flow from Operations ($) | Capital expenditures ($) | Free Cash Flow ($) | YoY Growth (%) |
|---|---|---|---|---|
| 2021-12-31 | n/a | -490,697,000 | 882,726,000 | 150.05 |
| 2020-12-31 | n/a | -270,579,000 | -1,763,622,000 | -264.61 |
| 2019-12-31 | n/a | -739,006,000 | 1,071,395,000 | 354.57 |
| 2018-12-31 | n/a | -1,486,843,000 | 235,696,000 | n/a |
- Average free cash flow: $106,548,750.00
- Average free cash flow growth rate: 80.0%
- Coefficient of variability (lower numbers indicating more stability): 1217.4%
With its positive cash flow, the company can not only re-invest in its business, it can offer regular returns to its equity investors in the form of dividends. Over the last 12 months, investors in MGM have received an annualized dividend yield of 0.0% on their capital.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts. As of the third quarter of 2022, the average P/B ratio for consumer cyclical companies is 3.11. In contrast, the average P/B ratio of the S&P 500 is 2.95. MGM Resorts International's P/B ratio is 2.8, telling us that the market value of the company exceeds its book value by a factor of 2, but is still below the average P/B ratio of the Consumer Cyclical sector.
As of third quarter of 2022, MGM Resorts International is likely undervalued because it has a very low P/E ratio, a lower P/B ratio than the sector average, and an irregular stream of weak cash flows with an upwards trend. The stock has mixed growth indicators because of its consistently strong gross margins with a positive growth rate, and a negative PEG ratio. We hope this analysis will inspire you to do your own research into MGM's fundamental values -- especially their trends over time.
