Nomura Stays Bullish Course on MGM Resorts International (MGM) Despite Share Weakness

MGM Resorts International (NYSE:MGM) shares were falling 9% yesterday and are continuing an almost 3% descent today after the casino giant came up short of expectations with its fourth-quarter print. Nonetheless, Nomura analyst Harry Curtis maintains his bullish perspective, as he believes the “Las Vegas miss overshadows positives.” Though earnings underperformed expectations, particularly when honing in on the Las Vegas Strip with its Mandalay Bay and MGM Grand Las Vegas locations, Curtis stays the confident course.

Therefore, amid share weakness, the analyst reiterates a Buy rating on shares of MGM with a $35 price target, which represents a just under 31% increase from where the stock is currently trading.

For the fourth quarter, MGM posted EBITDA of $666 million that missed both the analyst’s projection of $738 million as well as consensus of $714 million. Las Vegas EBITDA in a close-up also underperformed, with results of $365 million that did not meet the analyst’s forecast of $407 million. RevPAR of 3% also did not meet the Street’s expectations, which Curtis attributes to convention rotation. Though the analyst’s surveys reveal robust rate compression that arose near the close of the quarter, ultimately, he believes, “[…] it was not enough to offset lower group rates that were on the books 6-12 months prior to 4Q.”

From Curtis’ eyes, “The miss reflects the negative operating leverage in Vegas when high-margin conventions rotate out of the city. In 4Q15, several high-margin in-house groups contributed to record convention profits that did not return to Vegas in 4Q16. The negative impact on EBITDA was about $20mn because ancillary revenues associated with conferences such as banquet and AV have among the highest margins in a convention hotel. Poor sports book hold accounted for another $5mn of the EBITDA shortfall and the timing of increased ad spend accounts for another $5m.”

Positively, when considering regional EBITDA, National Harbor brought in $10 million in EBITDA, beating consensus of $8 million, which the analyst notes, “gives us greater confidence that the hotel can produce ~ $170 mn of EBITDA.” Meanwhile, Borgata EBITDA of $45 million fell “in line” with consensus of $48 million, as did Macau EBITDA of $137 million in juxtaposition with consensus of $134 million.

Looking ahead, “The challenge for MGM’s management is to better anticipate the positive and negative impacts of convention timing on operating margins because it is clearly higher than both the buy and sell sides appreciate,” Curtis surmises.

According to TipRanks, which measures analysts’ and bloggers’ success rate based on how their calls perform, five-star analyst Harry Curtis is ranked #157 out of 4,460 analysts. Curtis has a 70% success rate and realizes 14.7% in his annual returns. When recommending MGM, Curtis yields 3.3% in average profits on the stock.

TipRanks analytics exhibit MGM as a Strong Buy. Out of 7 analysts polled by TipRanks in the last 3 months, 6 are bullish on MGM stock while 1 is sidelined. With a return potential of 34%, the stock’s consensus target price stands at $36.00.

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