Riskier Gaming Stock: MGM Resorts Or Scientific Games?

The shares of Scientific Games (NASDAQ: SGMS) have gained 30% since the beginning of the year as compared to MGM Resorts (NYSE: MGM) which is still down by 35%. Both stocks are heavily loaded with debt, but MGM Resorts has a much lower debt-to-capital ratio of 0.55 as compared to 1.31 for Scientific Games. Is the market overlooking SGMS’ weak balance sheet? Considering the current stock price, Scientific Games and MGM Resorts are trading at a trailing P/S multiple of 1 and 0.8, respectively. Implying, an investor will have to pay $36 for Scientific Games’ $36 in sales/share as compared to $22 for MGM Resorts’ $26 in sales/share. Scientific Games might be better positioned to capitalize on the expanding sport betting market than MGM Resorts, but Trefis believes that MGM Resorts’ diversified global presence with prominent Vegas and Macau properties will aid in servicing its huge debt pile and preserve shareholder value.

The price-to-sales or P/S multiple for a company is higher when sales growth is higher, and it demonstrates the ability to consistently translate those sales to profits. The recent surge in SGMS stock occurred after a group of institutional investors acquired a 34.9% stake in the company at $28 per share. Our dashboard MGM Resorts vs. Scientific Games: Is MGM Stock Appropriately Valued Given Its significantly lower P/S Multiple Compared to SGMS? details the fuller picture based on Revenue Growth, Returns (ability to generate profits from growth), and Risk (sustainability of profits), parts of which are summarized below.

MGM Resorts owns & operates integrated resorts in the U.S. and Macau with a major contribution from Las Vegas properties. As a part of the asset-light strategy, MGM Resorts has been entering into multiple operating lease agreements with MGM Growth Properties and Blackstone to focus on margin improvement. More so, MGM’s $4.2 billion of operating lease liabilities are almost 30% of the $15 billion long-term obligations, indicating a much lower credit risk for MGM Resorts than Scientific Games, which has negligible operating lease liabilities.

1. Revenue Growth

While both companies’ top-line have been fueled by a series of acquisitions in the past three years, MGM Resorts’ revenues have grown by 36% from $9.5 billion in 2016 to $13 billion in 2019, whereas Scientific Games revenues have observed an 18% appreciation.

  • The opening of MGM Cotai & MGM Springfield, rebranding of Monte Carlo to Park MGM in Vegas, acquisition of Empire City Casino, and Northfield Park have been key factors driving the company’s top line in the past few years.
  • Instead, Scientific Games has been investing in technology by acquiring NYX Gaming Group, Don Best, and SpiceRack and signing long-term contracts with lottery operators.
  • The low-interest-rate environment following Covid-19 has made investors take a longer-term view, valuing higher growth companies more richly. As Scientific Games provides the underlying infrastructure for sports betting and online gaming, it has led to the surge in Scientific Games’ stock the past few months. For perspective, Scientific Games’ stock has surged by 754% since the lows in March as compared to 204% growth in MGM stock.

2. Returns (Profits)

In the past three years, MGM Resorts and Scientific Games’ operating margin has remained between the 10-15% range (excluding the impact of property transactions). However, both companies incurred sizable interest expenses dragging the net income margin to single-digits for MGM Resorts and into negative territory for Scientific Games. Thus, MGM Resorts has a slight edge over Scientific Games looking at historical profitability.

  • MGM’s Free Cash Flow as a percentage of revenue stood at about 14% in 2019, much higher than SGMS’s 4.2%.
  • However, SGMS’ Return on Invested Capital (ROIC) has been trending higher nearing MGM’s level of 5-8%.

3. Risk

Considering financial leverage, Scientific Games looks like a riskier bet than MGM, largely due to a higher debt-to-capital ratio and the balance sheet loaded with intangibles & goodwill.

  • In 2019, MGM Resorts and Scientific Games debt-to-capital ratio stood at 0.55 and 1.31, respectively.
  • Considering MGM’s near-term goal of expanding the BetMGM platform and a low current P/S multiple of 0.8 compared to previous years, we believe the stock could observe an uptick with the growing sports betting and online gaming market.
  • Also, the recent rally in Scientific Games’ stock has added $1.5 billion to the company’s market capitalization while MGM’s market capitalization remains flat. Interestingly, BetMGM is the leading iGaming platform in New Jersey, where online gambling was legalized in 2013, with a 19% market share.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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