MGM Resorts: Why The Odds Are Against This Casino

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The Massachusetts Gam[bl]ing Commission rubber-stamped MGM after New Jersey questioned.....curious white-washing!





MGM Resorts: Why The Odds Are Against This Casino

Summary

• MGM shares are up sharply over the past year and have outperformed rivals Las Vegas Sands, Wynn, and Caesars.
• MGM carries a significant debt load that could be problematic in the future.
• Investors should consider casino companies with better balance sheets.

Debt Load

The biggest headwind that MGM is facing is its debt load. Currently, MGM has just shy of $13 billion in debt. MGM equity has a market cap of $12.5 billion. While MGM has undergone a number of restructurings, the company continues to maintain a massive amount of debt. While MGM's debt level is no where near as extreme as Caesars, it is still significantly larger than Las Vagas Sands of Wynn. Right now, MGM's business is very strong and the company is earning significant profits.

 However, eventually, the economic cycle will turn and MGM will have a difficult time maintaining profits. While leverage is great during the boom times, it can be deadly during bad times. I believe leverage is especially dangerous in the casino business because earnings tend to be quite volatile depending on the economic environment. Companies in industries that produce steady earnings such as supermarkets, dollar stores, or utilities can easily carry a significant amount of leverage because operating cash flow is predictable. Comparably, a company such as MGM should not be carrying significant debt because of earnings variability. MGM will have a very difficult time riding out the next downturn.


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