MGM Dinged by Goldman Downgrade, Bank Has Preference for Penn, Portnoy

Posted on: September 14, 2020, 09:08h. 

Last updated on: September 14, 2020, 10:06h.

Todd Shriber @etfgodfather Read More
Expertise: Financial, Gaming Business, Mergers and Acquisitions.

MGM Resorts International (NYSE:MGM) was downgraded today by Goldman Sachs, the bank saying it’s concerned about the Las Vegas recovery trajectory, among other issues.

MGM downgraded by Goldman
The Mirage Las Vegas is open for business, but Goldman Sachs is bearish on MGM stock. (Image: Pinterest)

Shares of the Mirage operator resided around $15 in early August, and are trading around $23 today. That’s an impressive rally, to be sure. But Goldman analyst Stephen Grambling sees it as a case of too much, too soon. He lowered his rating on MGM to “sell” from “neutral.”

We anticipate a slower recovery in Las Vegas, which will drive downside to consensus estimates, and fundamental underperformance relative to peers,” he said in a note to clients.

Since the reopening of Nevada casinos in early June, analysts are frequently saying Sin City will rebound slower than other domestic gaming markets. Some go so far as to say a coronavirus vaccine is necessary to lure business and leisure travelers back to the casino hub. Compounding that problem for MGM investors is that Goldman’s Grambling believes Michigan and New Jersey – where the operator runs MGM Grand Detroit and the Borgata – are also in the “slow to recover” category.

Don’t Believe the Hype

MGM is the largest operator on the Las Vegas Strip, and recent price action in the stock signals a travel rebound to the biggest domestic gaming market that hasn’t yet materialized.

Last month, the company announced layoffs of 18,000 workers, or 25 percent of its workforce. While that move isn’t specific to Southern Nevada, there’s speculation that figure could grow. In its home market, MGM is grappling with a  scenario of dual misery: Lost convention traffic in the wake of the coronavirus, and reluctance on behalf of many leisure travelers to get on airplanes. As such, Goldman’s Grambling said the recent move in the stock is overdone.

“While MGM is re-rating off of lows, we see the rally as unwarranted, given lower exposure to the outperforming regional segment, only partial ownership of digital, higher exposure to group/convention mix, which we believe will recover slowly; and lowest mobility metrics/highest COVID-19 case count over the past two weeks,” he said.

The analyst said lower earnings estimates and a “valuation de-rating” could present downside of up to 12 percent for his $20 price target on the Bellagio operator.

Prefer Penn

Salting MGM’s wounds, Grambling reiterated a “buy” rating and a $66 price target on rival Penn National Gaming (NASDAQ:PENN). The analyst just started covering that name last month, and he’s enthusiastic about the operator’s relationship with David Portnoy’s Barstool Sports.

Goldman views the combination of Barstool’s loyal fan base and proficiency in content creation as compelling, because it can lower customer acquisition costs, which is a major hurdle facing companies throughout the sports betting industry.

Grambling prefers Penn to MGM because of the former’s “exposure to defensive regional markets, cost-cutting opportunities and, for PENN, the upcoming sports betting app launch with Barstool.”