MGM Resorts International has been a favorite play in the casino industry lately, not because its stock has risen, but because it has fallen less than competitors likeLas Vegas SandsandMelco Crown. While the slowdown in Macau has hammered companies with the biggest bet there, MGM has been doing all right thanks to a boost in Las Vegas and increased non-gaming revenue there.
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However, there could be tumultuous times on the horizon for the stock. We don't know what the future will hold for any individual stock, but here is a look at three reasons MGM's share price could fall further still.
The Bellagio, one of MGM's iconic Vegas resorts. Source: MGM Resorts International.
1. Hotel revenue in Vegas might be diverted to this coming megaresort
The massive slowdown in Macau is affecting MGM the least because only about one-third of the company's total revenue comes from Macau. Compare that to Las Vegas Sands, which gets nearly two-thirds of its total revenue there, or Melco Crown, with Macau being nearly its entire portfolio.
MGM meanwhile has 50% of its revenue base in Las Vegas. Following the recession of 2008, Vegas was hit hard, and revenues and new projects there both fell sharply, meaning MGM was lagging the market. Fortunately, Las Vegas is making a comeback, and MGM is the company with the most to gain here again. With 11 major properties in Las Vegas, more than any other company, MGM has been winning not only on gaming revenue there, but increasingly on non-gaming revenue as well, especially hotel revenue, where average revenue per available room (RevPAR) is increasing nicely.
However, this might not be enough to sustain continued growth as more competition is on the way to the Las Vegas Strip.
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A rendered view of what Resorts World Las Vegas is expected to look like. Source: Genting.
Malaysian company Genting, owner of Resorts World casinos in New York and around the world, is getting ready to start construction on a $4 billion project on the Vegas Strip called Resorts World Las Vegas. This massive project planned for completion in 2016/2017 will include three hotel towers, along with a massive gaming floor and a replica of the Great Wall of China.Analysts predict that the massive increase in hotel room supply will drive down RevPAR at nearby resorts. Since MGM has been using RevPAR to support its Vegas comeback story, this could be a reason the stock sees a sell-off as Genting's behemoth resort is finished.
2. MGM Macau could flop
Even though Macau has had a massive slowdown because of decreased income from the VIP segment, MGM and other gaming companies are still betting on the long-term story of Macau and the massive profits left to be gained on the growing mass-market segment.
That's why Las Vegas Sands and Melco Crown are so excited to open their new resorts on the Cotai Strip there this year. LVS's Parisian and Melco Crown's Studio City are slated to open in mid- to late 2015. However, MGM's newest resort under construction on the Cotai Strip will not open until later in 2016.
While The Parisian and Studio City are gaining on a resurgence in Macau revenue on a growing mass-market segment, MGM will be waiting to finish construction. Furthermore, with only 1,600 hotel rooms, MGM Cotai will be only a fraction of the size of the Parisian, at 3,000 hotel rooms. Once Macau looks better in 2015 than it did in 2014, investors may start flocking back to companies like Sands, which have the most to win there, while MGM is still waiting to finish its resort there.
3. Poor timing of new U.S. Northeast projects
The best new-construction scenario is for a company to have the cash reserves to build while the economy is down, and have new exciting resorts open during times that the economy is doing well.
Rendered view of MGM's National Harbor Maryland project. Source: MGM Resorts International.
However, often, the case is that the companies start building when the economy is at its best, and when the economy is down again, newly opened or nearly finished resorts don't stand a chance. Case in point: much of the construction that happened in Las Vegas in 2007/2008.
Right now, the U.S. economy is doing well, with consumer confidence at high levels. This is great for casino companies seeking leisure spending, so it's no wonder MGM is excited to be making way on two new massive projects in Pennsylvania and Massachusetts.
However, these resorts are not slated to be open until 2016 and 2017. Should we experience a cyclical downturn during that time, it's going to make it hard for MGM to make gains on these very large investments, meaning earnings could be down while debt is up, and the stock could take a big hit because of it.
So, while MGM still looks like it could be a good buy in this industry now, especially at its current valuations following the 2014 drop-off, there are a few reasons the stock may fall further. Watch to see what happens in Las Vegas, Macau, and the U.S. Northeast in the next 1-3 years, and know that your bet on MGM could be a risky one.
The article 3 Reasons MGM Resorts International Stock Could Fall Further originally appeared on Fool.com.
Bradley Seth McNew owns shares of Las Vegas Sands. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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