MGM Lauded By Analysts on Strong Q1 Earnings, Could Revisit Entain Deal

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MGM Lauded By Analysts on Strong Q1 Earnings, Could Revisit Entain Deal

MGM Resorts International (NYSE:MGM) is winning some praise from Wall Street  following sturdy first-quarter results and at least one analyst believes it’s possible the gaming company eventually revisits a takeover bid for Entain Plc (OTC:GMVHY).

MGM stocks
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MGM Grand Las Vegas. Analysts are mostly bullish on the operator’s shares. (Image: Eater Vegas)

Citing strength in Las Vegas, where it’s the largest operator on the Strip, the Mandalay Bay operator said revenue in the first three months of 2022 surged 73%. Strip sales checked in at $1.7 billion with earnings before interest, taxes, depreciation, amortization, and restructuring or rent costs (EBITDAR) of $594 million. Analysts expected EBITDAR of $577 million on revenue of $1.5 billion.

During the January through March period, MGM’s Las Vegas occupancy averaged 78% while revenue per available room (RevPAR) more than double to $154 from $60 a year earlier.

JPMorgan analyst Joseph Greff notes the recent pullback in shares of MGM is creating  buying opportunity, particularly as mid-week occupancy in Las Vegas rebounds thanks to recovering convention business. The analyst also notes it’s possible the casino revisits a takeover bid for Entain — its BetMGM partner — down the road.

We assume that from here MGM is content in its current ownership stake (50%) in BetMGM and likely waits out valuation and industry marketing rationalization before potentially revisiting an increased stake/purchase of Entain,” said Greff in a note to clients.

In January 2021, the Las Vegas-based casino operator bid $11.06 billion for Entain, but British bookmaker said the offer isn’t adequate. MGM didn’t publicly up its offer and the talks ultimately fell apart.

Greff rates MGM “overweight” with a $53 price target.

Good Thing for Vegas, BetMGM

Resilience in Las Vegas and strength in the BetMGM business are positive for investors on multiple levels, not the least  of which is that those traits offset some of the weakness the operator’s MGM China unit is encountering in Macau.

“The situation in Macau remains impossible to handicap, though at this point we think the market has proven it is willing to stomach that risk given healthy sequential trends in Las Vegas,” said Stifel analyst Steven Wieczynski in a note to clients.

On Monday, the Bellagio operator said it’s offering $607 million to acquire LeoVegas AB in a bid to expand into mature iGaming and sports wagering markets in Europe. LeoVegas is profitable and grew revenue a double-digit compound annual growth rate for the five years ending 2021. MGM said the purchase will be accretive to earnings. Wieczynski has mixed views about the transaction.

“While this is a somewhat small acquisition in the grand scheme of things, with the potential for the economy to soften, we would rather have kept that $600M on the balance sheet for a rainy day,” he said. “What is encouraging though is that their online market share remained steady despite MGM spending significantly less than peers.”

Loving Las Vegas

As the dominant operator on the Strip, MGM is highly tethered to demand trends in the largest domestic casino center. For now, leisure travelers appear undaunted by inflation and rising interest rates. For how long that enthusiasm lasts is up for debate.

Should the group/convention segment returns to 2019 levels, MGM would have another obvious tailwind to offer investors.

“The fundamental rebound in Las Vegas continues to accelerate, as evidenced by the results and commentary, and reference points to 2019 become less relevant,” writes Jefferies analyst David Katz. “Further, we believe the quarter reflects the improved execution, capital allocation and growth opportunities which are core to our positive thesis. Ultimately, we believe estimates should continue to progress higher, which should drive share performance.”

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