(By Rich Bieglmeier) MGM Resorts International (MGM) investors have been down on their luck for most of 2012. Shareholders have watched the stock crap-out, falling from a February high of $14.94 to an early August low of $8.83.
With the inflation-adjusted median household incoming falling 4.8 percent from June 2009 to June 2012, lower discretionary gambling dollars have hit the sector. According to the Nevada Gaming Control Board, Nevada gambling revenue in dropped a touch more than 3% to $859.2 million in August.
Additionally, economic softness in China produced the "under" for gambling revenue in Macau. The region is one of the few places where gambling is legal in China. Gaming analysts expected September Macau revenues to increase by 15%-17%; however, results came in at 12.3% growth; lower than expected, but still pretty good. On the news, Sterne Agee analyst, David Bain reiterated his buy ratings for MGM, Wynn Resorts Ltd. (WYNN) and Las Vegas Sands Corp. (LVS). He says, "market strength will continue overall in Macau."
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Fitch Ratings seems to agree with Bain. The ratings agency lifted it outlook on MGM to positive on October 11, 2012. Fitch anticipates "improvement in the domestic group's FCF (free cash flow) profile, continued Macau dividends, and/or the use of cash on hand to pay-down near-term maturities to aid MGM's de-leveraging."
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The rating agency believes domestic free cash flow for MGM "to be breakeven to slightly positive in 2013 and improve to exceed $200 million starting 2014." Fitch added, "MGM should benefit from the attractive supply/demand outlook on the Strip over the next couple of years."
Fitch's analysis doesn't include a potential, huge catalyst. Industry pros believe that last year's U.S. Justice Department declaration that only betting on sports online is unlawful. Experts believe it will open the door for states to offer online poker, craps, blackjack… to their citizens. With states hurting for cash, you can bet you'll be reading about it soon.
That's only if the federal government doesn't set the standard first. The American Gaming Association says that Americans are expected to gamble more than "$10 billion or more over the next several years, from about $4 billion in unauthorized gambling in 2011." If you think that states and the federal government are going to let those dollars go untaxed, go ahead and bet on getting "an inside straight on the river."
iStock focused on MGM instead of WYNN or LVS because two of our favorite metrics are marked down heavily. MGM trades at 0.89 its book value. Meanwhile, WYNN is valued at 33.95 x book, and LVS at 4.18, according to Yahoo finance.
On a price-to-sales basis, one of Ken Fisher's favorite measuring sticks, MGM is priced at 58 cents for every dollar per share in revenue. That's a huge discount to WYNN's 2.33 and LVS 3.58 price to sales ratios.
If MGM Resorts International (MGM) to its five-year averages for price-to-book of 1.38, and price to sales of 0.96, the stock price would have to increase to $16.16 or $17.74, respectively.
Overall, with travel & leisure stocks making our emerging bull sector list, a steady Las Vegas Strip and Macau, free cash flow on the improve, discounted valuations, and a potential "game changing" catalyst on the horizon. iStock believes MGM could be right for investors with above-average risk-tolerance.