Value Briefing on MGM Resorts International (MGM)

Resorts & Casinos company MGM Resorts International is trading at $34.67 this morning after marking a 0.9% change compared to the S&P 500, which moved 0.6%. MGM is -30.99% 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 underperfomed the S&P 500 by -5.5%, moving -24.1%.

MGM Resorts International, through its subsidiaries, owns and operates casino, hotel, and entertainment resorts in the United States and Macau. The company is a consumer cyclical company, whose sales figures depend on discretionary income levels in its consumer base. For this reason, consumer cyclical companies have better sales and stock performance during periods of economic growth, when consumers have more of an incentive to spend their money on non-essential items.

MGM Resorts International's trailing 12 month P/E ratio is 11.4, based on its trailing Eps of $3.03. The company has a forward P/E ratio of 42.8 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 for US consumer cyclical companies is 24.11, and the S&P 500 has an average of 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.

One limitation P/E ratios is that they don't tell us to what extent future growth expectations are priced into MGM Resorts International market valuation. For example, a company with a low P/E ratio may not actually be a good value if it has little growth potential. On the other hand, it's possible for companies with high P/E ratios to be fairly valued in terms of their growth expectations.

Dividing MGM Resorts International's P/E ratio by its projected 5 year earnings growth rate gives us its Price to Earnings Growth (PEG) ratio of -0.18. Since it's negative, either the company's current P/E ratio or its growth rate is negative -- neither of which is a good sign.

To understand a company's long term business prospects, we must consider its gross profit margins, which is the ratio of its gross profits to its revenues. A wider gross profit margin indicates that a company may have a competitive advantage, as it is free to keep its product prices high relative to their cost. After looking at its annual reports, we obtained the following information on MGM's margins:

Date Reported Revenue ($ MM) Cost of Revenue ($ MM) Gross Margins (%) YoY Growth (%)
2021-12-31 9,680 5,031 48.03 45.06
2020-12-31 5,162 3,453 33.11 -19.36
2019-12-31 12,900 7,603 41.06 -0.29
2018-12-31 11,763 6,919 41.18 n/a
  • Average gross margin: 40.8 %
  • Average gross margin growth rate: 8.5 %
  • Coefficient of variability (higher numbers indicating more instability): 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.

To deepen our understanding of the company's finances, we should study the effect of its depreciation and capital expenditures on the company's bottom line. We can see the effect of these additional factors in MGM Resorts International's free cash flow, which was $882,726,000.00 as of its most recent annual report.

The balance of cash flows represents the capital that is available for re-investment in the business, or for payouts to equity investors as dividends. The company's average cash flow over the last 4 years has been $106,548,750 and they've been growing at an average rate of 80.0%. MGM's weak free cash flow trend shows that it might not be able to sustain its dividend payments, which over the last 12 months has yielded 0.0% to investors. Cutting the dividend can compound a company's problems by causing investors to sell their shares, which further pushes down its stock price.

Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (its share price divided by its book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.

Mgm resorts international's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 2.8, but is still below the average P/B ratio of the Consumer Cyclical sector, which stood at 3.11 as of the third quarter of 2022.

Since 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, MGM Resorts International is likely undervalued at today's prices. The company has mixed growth indicators because of a negative PEG ratio and consistently strong gross margins with a positive growth rate. We hope you enjoyed this overview of MGM's fundamentals. Be sure to check the numbers for yourself, especially focusing on their trends over the last few years.

The above analysis is intended for educational purposes only and was performed on the basis of publicly available data. It is not to be construed as a recommendation to buy or sell any security. Any buy, sell, or other recommendations mentioned in the article are direct quotations of consensus recommendations from the analysts covering the stock, and do not represent the opinions of Market Inference or its writers. Past performance, accounting data, and inferences about market position and corporate valuation are not reliable indicators of future price movements. Market Inference does not provide financial advice. Investors should conduct their own review and analysis of any company of interest before making an investment decision.