MGM Resorts International (NYSE:MGM) is the largest operator on the Las Vegas Strip, and the shares are up 41 percent year-to-date. But one analyst is making the case the stock isn’t adequately appreciated.
In a note to clients today, Credit Suisse analyst Benjamin Chaiken upgrades the Bellagio operator to “outperform” from “neutral,” with $68 price target. That implies upside of more than 53 percent from the Oct. 11 close. Chaiken’s call is sparking an impressive rally in MGM stock, sending it higher by more than seven percent on volume that’s already more than double the daily average.
MGM is a consensus Neutral name, in part due to a ‘conglomerate discount,’ but we think sentiment will improve. This should change now that business is being streamlined,” said Chaiken in the note. “Further, MGM will end up with ~$9 billion of cash, and can either buy back a material portion of its market cap, or invest in high growth areas, such as sports betting.”
The analyst’s bull call on the casino giant comes as the company is weighing options regarding how to proceed with its thriving BetMGM unit. DraftKings (NASDAQ:DKNG) is attempting to acquire Entain Plc (OTC:GMVHY), MGM’s partner in the BetMGM venture.
MGM Deserves More Credit for Transformation
MGM is one of the pioneers of the asset-light strategy in the gaming industry, having significantly whittled its property holdings to become a leaner, cash-rich operating company. While those asset sales have been taking place for two years, Credit Suisse’s Chaiken argues the stock isn’t getting enough credit for the company’s transformation.
“MGM has gone through a transformation, recently announcing four transactions, and we believe the market is not giving full credit,” said the analyst.
The operator’s recent spate of deal-making includes purchasing the operating rights of the Cosmopolitan on the Strip for about $1.6 billion, acquiring the 50 percent of City Center it didn’t previously own and using that transaction to sell the real estate of Aria and Vdara to Blackstone for $$3.89 billion and VICI Properties’ (NYSE:VICI) $17.2 billion all-stock acquisition of MGM Growth Properties (NYSE:MGP).
That takeover efficiently monetizes MGM’s $4.4 billion stake in the real estate investment trust (REIT), and the gaming company is getting a one percent interest in the new VICI.
Those transactions make MGM a “cleaner, more simplified organization, with a more attractive capital structure,” said Chaiken.
Options for Cash, Limited Macau Impact
As Chaiken notes, MGM could buyback a significant chunk of its $21.57 billion in market capitalization with its $9 billion in cash. But it’s unlikely the company will spend all of that capital on share repurchases.
Should DraftKings acquire Entain and MGM is successful in retaining BetMGM, the casino company will need a technology partner for the online gaming unit, and it could acquire one with a portion of the cash stockpile/ But it remains to be seen if that will be necessary.
As for the operator’s Macau exposure, which may appear to be a liability due to recent regulatory headwinds, Chaiken notes MGM China accounts for just $4 of MGM’s stock price.
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