MGM stock has not had a great start to the year. Neither has the rest of the US market of course. MGM is down 17.5% year to date with the S&P down 5%. A look at the headlines for MGM could give the impression, which I believe false, that MGM is declining for fundamental reasons. Earnings were far off the mark, with a loss of 1 cent per share compared with consensus estimates of a gain of 7 cents. Sounds bad, sure, but the loss can be blamed, once again, on Macau.
While MGM does not have a huge presence there compared to its competitors, it still lost a lot of money on its Cotai property, and it was MGM China’s losses that accounted for both the earnings and revenue misses. MGM China revenue on the whole declined 31% year over year. There is now a big hole in MGM’s balance sheet due to a goodwill impairment that will take years to rebuild. But other than that, things look good for Las Vegas’s largest single employer.
Net revenue at MGM’s domestic resorts is up 2%. EBITDA, which gives a much clearer idea of pure business going on there, is up 15% year over year. EBITDA margin is up 27.3%, an impressive 330 basis points from the year ago quarter. CityCenter earned an all time record EBITDA, 36% up year over year. Gaming volume is slightly down, but hotel occupancy was at 89% for 2015, up from 88% in 2014 despite a higher average daily rate. That means Las Vegas guests are packing in even at higher rates, willing and able to spend more. The credit supply is still growing nicely. In short, there is nothing to indicate, as per the MGM Economic Indicator, that the US economy is in any immediate danger right now – not to say that it won’t be in a few months, just that right now it looks fine.
So why is MGM down so sharply so far this year? Well, along with the rest of the market, MGM seems to be suffering from the side effects of the oil downturn. I had said this over a month ago as speculation, but now it’s getting some traction from the more official people with bigger names and more impressive sounding acronyms and credentials than me, like the Sovereign Wealth Fund Institute, the SWFI. Both Bloomberg and CNN are picking up on it now, as both are quoting the SWFI as saying that over $400 billion may be withdrawn from global stock markets this year by governments if crude stays below $40. They also said that 2015 saw liquidations of $213 billion, meaning this year’s selling could double last year’s.
In order to keep up their extravagant spending habits, oil countries are busy liquidating their stock portfolios, and this will only stop either when Saudi Arabia’s royal family stops spending so much money (there is a much better chance of them all converting to Judaism and joining the Zionist cause), or when the price of oil gets back into the $60-$70 range or so. While the latter will eventually happen by necessity, timing is impossible.
Here’s the problem though. We are now moving into that time of year when credit growth tends to start slowing. It typically keeps slowing until somewhere around August, about 6 months from now. Oil may recover by then, but it may take more time. 6 months from now, credit growth will already have reached its annual trough, which typically means trouble for stocks. On that basis one could argue that there isn’t enough time for stocks like MGM to begin a new uptrend, because even if oil recovers by then to the point where Saudi Arabia and Norway and whoever else stops liquidating their stock portfolios, we’ll be dealing with credit contraction, a double whammy, one-two punch. So maybe it’s time to sell and take a loss now.
I don’t believe that argument holds water though. Here’s why. All this selling from oil exporters is putting Wall Street market makers in a sour mood. They’re hoarding more cash, going risk off, lightening positions, waiting for a clear uptrend to resume. That means there is more dry powder out there for the institutional investors. On top of this we are at a money supply growth peak right now. In fact, Blackstone (BX), the alternative asset manager responsible for helping Amaya buy Rational Group by almost inexplicably putting up $3 billion, reported in its last earnings call that it has more dry powder now than it has ever had in its history. If that’s the case with them, it’s probably similar with other institutional investors as well.
The positions that commercial investors are taking now are also cheaper than they otherwise would be, aside from purposely keeping higher cash levels. What this means is that when credit gets substantially tighter, as it usually does and probably will again by April/May, there will still be piles of cash available for buying stocks, leftover from now. Think of that cash as a strategic reserve for times when credit gets tighter. In other words, what happened last August when money supply growth stopped and the Dow dropped 1,000 points in a day probably won’t happen again this year because it is already happening now in advance due to oil factors.
So even if it takes longer than six months for oil to recover, MGM still looks like it can’t go down much farther. Given that, and its decent earnings despite missing expectations, it still looks like a good buy at this point if you’re willing to hold on to it for a while and be patient.
