MGM Resorts International (NYSE: MGM) shares have struggled to exit a trading range entered in 2021 and recently moved to retest the lows, providing an opportunity the insiders took advantage of. The low was triggered by fear of recession caused by weaker-than-expected labor market data, which is healthy compared to historical norms.
The critical takeaway is that insiders, who have only sold shares for the prior seven quarters, made big bets on the stock. Three insiders, including the CEO, CFO, and board chairman, purchased shares amounting to $7.3 million. Their activity brings total holdings to over 2.1%, suggesting a deep value for investors.
Analysts echo the sentiment, pointing to a deep value for investors because MGM stock is trading 20% below its lowest target. The targets have fallen over the last year but bottomed following the Q2 earnings report, with most bracketing consensus. Consensus implies a 45% upside for this stock and it may move higher over the next few quarters. Consensus may increase because the company is outperforming expectations, consumers remain resilient, and the FOMC will soon lower interest rates. Lower interest rates are expected to free up discretionary dollars that could be spent on experiential entertainment and hospitality.
MGM Resorts Outperforms in Q2
MGM Resorts had a solid quarter in Q2, producing better-than-expected top and bottom-line results. The $4.32 billion in consolidated revenue is a quarterly record, up 10% YOY, on strength in two of the three operating segments. Growth was strongest in China, where revenue increased by 37%. The gains are partly due to easy comps; COVID-related shutdowns and travel restrictions impacted Q2 2023; that segment is still ramping higher. Las Vegas Strip revenue grew by a smaller, low-single-digit figure while Regional activity was flat.
Margin news was mixed, with net income falling compared to last year, aided by a decline in gaming wins. However, Adjusted EPS also outpaced consensus and grew 45%, helped by share repurchases. The company’s cash flow and free cash flow allowed for $413 million in buybacks, with all repurchased shares retired while preserving balance sheet strength. The net result is a 14% reduction in share price and expectation for buybacks to continue.
MGM Offers Value for Patient Investors
MGM is trading near the middle of its historical P/E range, nearly 14x this year’s earnings estimate. However, it is a value relative to the consensus estimate for next year, which may be cautious. While high interest rates and persistently high inflation have curbed consumer spending habits, the labor market remains healthy, wages are growing, and consumer spending is rising. There is a risk of recession, but it is small, given the economic trends and expectations for the FOMC to cut interest rates. At this time, the worst that can be expected is stagnating economic growth sufficient to sustain MGM's cash flow and capital return.
Institutional activity aligns with the recent price action and outlook, selling when the price is up and buying when it is down. The dynamic has the market well-supported at the bottom of the range. The range bottom is unlikely to break without a change in the fundamental outlook because total institutional ownership is nearly 70% and will increase on balance in 2024.
The Technical Outlook: MGM Resorts Trades Near Rock Bottom
MGM Resorts is trading near rock-bottom prices and unlikely to move below the ranges’ low end, but there are risks. The economic and consumer data is healthy now but could start contracting anytime because of macro headwinds. The risk is that economic data will deteriorate despite the FOMC cutting rates, manifesting as reduced traffic at MGM properties. The stock could fall below $34.50 despite insider support in this scenario because of shifting institutional interest. Deteriorating economic data will lead the market into risk-off, non-cyclical names that pay consistent dividends.
