Deutsche Bank analyst Carlo Santarelli met with MGM Resorts International CEO Bill Hornbuckle and CFO Jonathan Halkyard earlier this week and came away reassured. Topics covered included the Las Vegas Strip, Macau, and BetMGM.
Santarelli began by assuring investors that MGM can continue share buybacks, despite high-dollar commitments in Japan and elsewhere. He called the current climate for repurchases “attractive … given the implied valuation of the core business.”
With regard to BetMGM, he deemed it “very successful to date,” especially in igaming. It’s not only in the top two in market share — rivaled only by DraftKings — in icasino games, it’s also the frontrunner in the markets where it’s presently active. The analyst described icasino as “healthily profitable,” with losses stemming from online sports betting (OSB). Management intends to address the latter via a new, single-game, parlay system and a digital-wallet payment, both to be rolled out in time for NFL season.
Spending on OSB and promotions is expected to diminish. Still, Santarelli got the sense that “near-term profitability is secondary to continued growth within the business,” although he didn’t rule out positive return on investment in the second half of this year.
“While the BetMGM venture has been successful in establishing itself as a leader in the domestic digital-gaming arena, we think it is becoming more evident that the JV structure likely needs to be reconciled and we believe this is something both sides continue to contemplate,” Santarelli reported.
He described the solution as “binary,” with MGM either allowing itself to be bought out or purchasing the 50 percent of BetMGM held by Entain, then sublicensing the technology. Santarelli said he struggled to foresee a solution whereby the 50/50 relationship between MGM and Entain persists into the long term.
The analyst described a “steady and optimistic” management outlook regarding business on the Las Vegas Strip. In the first quarter of the year, gross gaming revenue exceeded omicron-challenged 2022 by 12.4 percent and pre-COVID 2019 by 28.3 percent. However, he sketched a lean second-quarter picture, with April up 5.3 percent, but May dropping 1.7 percent and June 7.6 percent, mainly due to “difficult baccarat-hold comparisons” in the latter two months.
Hornbuckle and Halkyard said midweek hotel occupancies on the Strip were continuing to improve, as pricing remained stable and group business burgeoned. Santarelli added the caveat that some of the meeting-related traffic comprised events rebooked from COVID-quashed 2020. He opined that hotel business would remain “solid” through the year, abetted by a strong Las Vegas Raiders schedule, the Las Vegas Grand Prix, and “potentially” the opening of Fontainebleau.
Management was also upbeat about Macau and its gross-gaming-revenue rebound, with leadership expressing confidence that 2024 could see Macanese-derived cash flow of $1 billion. Santarelli added, “While May has been perceived by the investment community as a bit of a setback, management noted that the COVID spike could have played a role in the modest softening … while also noting that bookings remain strong and forward indicators for the summer months are promising.”
MGM China continues to defend its market share successfully, having outperformed most of the enclave since reopening. “In the event MGM is able to maintain share, we see considerable upside to current forecasts,” Santarelli predicted.
On the regional front, both National Harbor in Maryland and Beau Rivage in Biloxi continued to be “solid.” Labor negotiations at Atlantic City’s Borgata and National Harbor are done deals, while those at MGM Grand Detroit continue. On the Las Vegas front, union pacts have been extended through the end of July. Santarelli forecast that most of the expected salary bump would be felt in year one of the new four-to-five-year contracts, once negotiated.
He continued, “Despite the escalator getting the bulk of the focus from the investment community, the negotiations are likely to be complex, with other details around operator flexibility, with respect to labor and the use of technology, likely to curb the burden of the escalator to some degree.”
Finally, Santarelli recorded his expectation that the casino-award process for New York City “is is likely to continue to move slowly, though there is some optimism licenses will be awarded in 2024.” If indeed MGM Empire City receives Class III designation as anticipated, Santarelli believes a Long Island or Manhattan site is most conducive for MGM Empire City, while one at Citi Field (pursued by New York Mets owner Steve Cohen and Hard Rock International) would create the most competitive pressure.
