Merrill Lynch is making a significant call on the U.S. Gaming space saying the believe Las Vegas is on the cusp of a multi-year cyclical recovery, driven by favorable supply-demand dynamics of accelerating RevPAR and gaming win against decelerating room supply.
– MGM Resorts (NYSE:MGM) upgraded to Buy from Neutral with a $21 target (prev. $17)
– Boyd Gaming (NYSE:BYD) upgraded to Buy from Underperform with a $16 target (prev. $9.50)
Why upgrade now? Sharp group biz rebound is accelerating recovery
Recent commentary from both gaming and pure lodging companies points to a very sharp recovery in both Las Vegas and broader U.S. group business trends. Two such examples are Las Vegas Sands and Starwood. On its 4Q10 earnings conference call, LVS noted that 2011 group bookings are up 100%+ vs. where they were at this point last year for 2010 and estimated group rooms of 781K in ’12 with ADR up over 10% on those bookings.
To get a sense for bigger picture U.S. group business trends, on Starwood’s 4Q earnings call it noted that December 2010 group bookings “crushed” the all-time monthly record, its group bookings pace is up double-digits in ‘11, and that group booking windows have begun to lengthen as corporates plan events further out in the spectrum as visibility increases. These trends should be no different for MGM and Merrill doesn’t want to miss the turn. Corporate business is only 15-20% of the mix for MGM, but like with the lodging companies, investors underestimate the power of mix shift early in the cycle – particularly at MGM’s best hotels like Bellagio, CityCenter, Mandalay Bay and MGM Grand.
A number of catalysts should drive MGM shares in 2011
In addition to their belief that MGM’s estimates have finally bottomed, catalysts include: 1) a 4Q EBITDA beat (our $317M vs. Street’s $286M) that could be the first in 21 quarters, 2) sequential EBITDA acceleration in 4Q and 2011 as 4Q could be the first Y/Y growth in 3+ years, 3) favorable monthly Las Vegas gaming results, and 4) strategic moves including a Borgata sale.
Actions in ’10 solve the balance sheet issue until 2013
Merrill notes their big hang-up has been MGM’s balance sheet. While MGM is still not FCF positive, they see less of an overhang as a result of actions taken in 2010 (several note offerings, a $600M secondary and CC refi). The firm doesn’t expect a dilutive equity offering until mid/late 2012.
Their bet is simple: Glass is half empty to glass is half full
As revenue trends improve MGM shares should follow. Sentiment will improve from “the glass is half empty” to “the glass is half full”, and recognize that each business has increasing potential for significant EBITDA margin expansion and upward earnings revisions. The sensitivities to improvement are clear.
20% of MGM’s float remains short, which can continue to come down as skepticism in a recovery, and fears of a second liquidity crisis, decline. Then, as the recovery has taken hold and picked up momentum, investors will begin to embrace MGM’s captive real estate value and some of the non-EBITDA generating assets accumulated during the boom years like its vast Las Vegas land holdings.
Notablecalls: So we have a tier-1 firm openly calling for a bottom in Las Vegas. Due to trading volume, MGM is my poison of choice. Given the high short interest and the recent pullback, this one could see levels close to $16 today.
I think BYD moves as well. Here’s what Merrill had to say about it:
Las Vegas is recovering and we believe Boyd is a derivative way to play the recovery with nearly 50% of total EBITDA coming from the Las Vegas Locals and Downtown markets. We upgraded MGM to BUY this morning on the Las Vegas recovery potential, and BYD eventually should benefit from the same trends.
BYD could easily do $11.75+
You may want to wait for open to initiate positions. Paying up in the pre market may not be the wisest idea as MGM trades 20-50mln per day. Not exactly a thin name.
Also, note that Asian casino names saw some selling overnight.