MGM Stock Sporting Attractive Risk/Reward Says Analyst

Posted on: July 12, 2024, 11:55h. 

Last updated on: July 12, 2024, 12:30h.

Todd Shriber @etfgodfather Read More

Expertise: Financial, Gaming Business, Mergers and Acquisitions.

After dithering for much of this year, shares of MGM Resorts International (NYSE: MGM) are on a torrid pace as of late, as highlighted by a gain of 7.53% over the past week and 13.51% over the past month.

Analysts are bullish on the stock, and that group includes JPMorgan’s Joseph Greff, who in a recent note to clients, reiterated an “overweight” rating on MGM with a price target of $57. That implies upside of nearly 24% from the July 11 close. In noting the risk/reward setup currently afforded by MGM stock is “favorable,” Greff observed the shares have been hindered for much of this year by “terrible sector investor sentiment shaped, primarily, by macro/consumer concerns.”

Those concerns aren’t yet evident on the Las Vegas Strip where MGM is the largest operator. Business there remains robust, but some of the angst investors have displayed toward the stock this year is attributable to lethargy in some regional gaming markets where cost-conscious consumers have reined in spending amid sticky inflation. In more positive news, there are hints of stability in regional casino markets that could be discussed when MGM reports second-quarter results on July 31.

MGM Stock Not Reflecting Some Interesting Projects

It’s widely known that MGM is working on an integrated resort in Osaka and that the first Japanese casino hotel is expected to open in 2030.

While that’s old news at this point, Greff argued that the Osaka project and the possibility of MGM eventually opening a gaming venue in the United Arab Emirates (UAE) aren’t adequately reflected in the current price of the stock.

The analyst acknowledged that there are no guarantees about what could happen in the UAE, as no formal gaming regulations have been established there, but he added MGM can handle a project there and its commitments in Osaka.

We do not think these projects are currently reflected in its shares, but we suspect that MGM’s funding contributions from free cash flow in Japan may entice investors to ascribe some equity value sometime during 2024,” wrote the analyst.

In what he deemed to be “conservative” estimates, Greff said a “hypothetical” UAE gaming project would be accretive to MGM stock while Osaka could add as much as $18 a share in value.

MGM Balance Sheet Praised

MGM has long had one of the sturdiest balance sheets in the industry, which has allowed the operator to be an avid buyer of its own shares while pursuing acquisitions aimed at bolstering its digital gaming unit.

Greff said the company has $2.4 billion in cash on hand and another $622 million via MGM China. Even when excluding the Macau cash, MGM’s cash on hand is equivalent to 16.6% of its market capitalization.

“A slowing macro and related consumer retrenchment in both the US and China have been discussed ad nauseam, but we think MGM has embedded resilience with its higher-end leisure-customer exposure and a diversified earnings base that attracts significant non-gaming demand,” concluded the analyst.