Conditions are finally looking up for MGM Resorts International (NYSE: MGM). After years of pandemic lockdowns, its cash-producing casinos in the Chinese special administrative region of Macao are well into a recovery.
However, investors with longer memories know the pandemic's effects on the company and other downturns. The question for investors is whether they can earn market-beating returns with MGM Resorts under such conditions.
MGM Resorts explained
MGM Resorts (a company not affiliated with the MGM movie studio) owns 31 hotel and gaming destinations worldwide. Americans likely know it best for the MGM Grand in Las Vegas, but it also owns other casinos on the Strip, such as Mandalay Bay, Excalibur, and others.
The company also operates casinos in other parts of the U.S., such as Mississippi, Michigan, and Maryland. Nonetheless, its biggest cash cows are the two casinos it owns in Macao, the MGM Macau and MGM Cotai.
As one might imagine, pandemic lockdowns hit these casinos hard, and they have just now begun to recover. MGM China's revenue rose 78% from year-earlier levels to $1.1 billion in the first quarter of 2024.
That makes up about 25% of the company's revenue. Still, despite MGM generating more revenue in Las Vegas, the picture is different for the industry as a whole. Macao generated six times more gaming revenue than Las Vegas in 2019, according to the Public Gaming Research Institute. Today, Macao has reclaimed that leadership after bouncing back from the pandemic.
Additionally, other parts of East Asia have also become popular gaming destinations. In addition to the Macao casinos, the company is building a $10 billion complex in Osaka, Japan. While it will not be open until 2030, it will likely shift more of the company's focus to Asia.
Where MGM Resorts stands
Indeed, a recovery in Asia is probably what MGM Resorts needs. In Q1, revenue rose 13% from year-ago levels to $4.4 billion, lagging the 2023 yearly growth rate of 24%. Its resorts on the Strip earned $2.3 billion in revenue, about 52% of the quarterly total.
Also, MGM Resorts reported $217 million in net income in the quarter. That lagged its Q1 2023 performance. However, the Q1 2023 results included proceeds from the sale of the Gold Strike Casino Resort in Tunica, Mississippi. If not for that transaction, MGM's net income would have risen significantly in Q1 2024.
Unfortunately, the performance of MGM Resorts is a mixed picture. Indeed, it outperforms casino stocksLas Vegas Sands and Wynn Resorts by being the only one of the three to deliver positive returns during the past 10 years.
Unfortunately, MGM Resorts has dramatically underperformed the S&P 500. Also, this underperformance has persisted over nearly every time interval, which bodes poorly for the stock and its peers.
Additionally, its valuation is not likely to drive investors into the stock. The price-to-earning ratio (P/E) of less than 18 is not high compared to the S&P 500 average of about 24.5, and it is less expensive than Las Vegas Sands at 20 times earnings. Although Wynn Resorts sells at a much cheaper 12 times earnings, its steadily declining share price probably negates the benefit of that low multiple.
Should I buy MGM Resorts stock?
MGM Resorts appears on track to continue its recovery. Unfortunately, the stock is one investors probably should avoid.
Admittedly, it delivers higher returns than its main competitors. Moreover, a recovery in Macao and the eventual opening of its casino in Japan should be positive for the stock long term.
Nonetheless, the stock has underperformed the S&P 500 across all time periods during the past 10 years. Also, even if it increases its returns, investors will have to account for periodic pullbacks amid the cyclicality of the economy. Given this past performance, investors are likely better off sticking with the indexes.
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Will Healy has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
