MGM Resorts’ Mountain of Debt Not Deterring Investors, at Least for Now — Q1 Earnings Report Coming Monday

Posted on: April 25, 2019, 12:50h. 

Last updated on: April 25, 2019, 12:54h.

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

As of April 24, MGM Resorts’ market capitalization (the amount of shares outstanding multiplied by the stock price) was $14.94 billion, meaning MGM market value is roughly equivalent to its debt.

No sooner had Brian Sandoval (right) turned over the reigns to Steve Sisolak as Nevada’s governor in January than he announced he’d be joining MGM Resorts in its push to gain a Japan casino license. But can the gaming operator overcome its indebtedness problem? (Image: Tom R/Smedes/AP/ finviz.com)

That also puts MGM — owner of the Bellagio, Mandalay Bay, The Mirage, and 11 other Las Vegas Strip casino resorts — at a debt burden significantly higher than those of its three primary rivals: Caesars Entertainment, Las Vegas Sands, and Wynn Resorts.

For now, investors do not appear bothered by MGM’s nearly $15 billion in debt. The stock is up 14.55 percent year-to-date and is higher by nearly 8 percent this month ahead of the company’s first-quarter earnings report on Monday, April 29.

Analysts Not Looking Favorably

But lurking — and potentially poisoning — investor outlooks for MGM are the comps. No, not casino comps, but the comparisons that analysts and investors use to evaluate companies. Wall Street compares Coca-Cola to PepsiCo and Apple to Google. Translation: MGM’s $15 billion debt pile looks bad compared to the $11.9 billion in debt at Las Vegas Sands or Wynn’s $9.5 billion burden.

Even once financially downtrodden Caesars Entertainment’s $8.8 billion in liabilities looks good compared to MGM’s these days.

Of course, companies carrying debt is nothing new and it is not always even a bad thing per se. The size of the US corporate bond market is $8.8 trillion and companies use proceeds from debt issues for a variety of functions, including stock buybacks, dividends, acquisitions, and other corporate purposes.

Ratio Worries

Broadly speaking, investors do not punish companies for issuing corporate debt. But they do punish companies that struggle to service that debt.

Investors considering rolling the dice with MGM can easily gauge the company’s ability to service its debts with a tool known as the “current ratio”. That’s a company’s current assets divided by its current liabilities.

Financially sound companies with strong credit ratings likely have current ratios of 1.5 or higher, while those below 1.0 are considered potentially concerning. MGM’s current ratio now stands at 0.86. Caesars, Las Vegas Sands and Wynn have an average current ratio of 1.1.

To be fair, MGM had a debt-to-equity ratio of 1.44 at the end of last year. That metric simply measures a company’s long-term liabilities divided by shareholders’ equity. Measurements of 1 to 1.5 are considered strong. While decent on the debt-to-equity front, MGM trails each of its three key rivals by that metric.

What could draw investors’ ire is that MGM isn’t shying away from issuing more debt, which is potentially problematic with interest rates higher today than they were several years ago.

The company is angling for a gaming license in Japan — and has brought former Nevada Governor Brian Sandoval on board to help promote its cause there. MGM previously has said it could cost $10 billion to plan and open an integrated casino resort in the Asian nation.