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The Second Wave Is Creating a Second Chance to Buy MGM Stock

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Sure it’s been a long hard 2020 for MGM (NYSE:MGM), so you can forgive MGM stock investors for having a sense of whiplash this year.

MGM Stock Shows Signs of Life Amid Second Virus Wave Concerns

Source: Jason Patrick Ross / Shutterstock.com

The market crashed and then recovered so quickly that it seems like it passed in the blink of an eye. While there were a ton of bargains available in March, stocks are getting expensive again. However, the novel coronavirus isn’t gone. In fact, there’s a rising wave of cases and deaths across numerous U.S. states. This, in turn is pounding the shopping, travel, and casino stocks.

Taking a broader look, MGM fell from $30 pre-Covid to $6 at the height of the panic in March. Shares rebounded to $24 last month as casinos reopened and the future looked bright. With the virus forming a second wave, however, the recovery has lost steam.

Retail foot traffic has started to decline again for the first time in the past ten weeks. Casinos may see a similar effect as the novelty of going out in public again wears off, while people hunker down until the virus news improves.

 

MGM stock has fallen nearly a third since its June peak on these concerns. While that’s a valid worry, traders may be overreacting. There’s potentially deep value in MGM here for longer-term investors that can ride the waves.

MGM Stock: A Full-Cycle Bargain

Investors tend to focus on the price/earnings ratio for determining if a stock is cheap or not. That’s logical for many companies. With MGM, however, it can be misleading. That’s because MGM has exceptionally volatile earnings. In 2011, MGM earned more than $5/share. It proceeded to lose money each of the next four years.

Since 2016, the company has earned money every year, with EPS coming in between $1 and $4. That’s huge variance, of course. However, the average is more than $2 per year over the past four years, which would imply a normalized 8x PE ratio at the current $16 stock price.

The thing is, the stock is going to look expensive for 2020 (and probably 2021) thanks to the virus. However, when you consider MGM’s earnings power over the span of a full economic cycle, it stands out as attractive. And, generally, earnings should be advancing.

The competitive pressure in the company’s core Las Vegas market should be lifting a bit. Meanwhile, MGM is bringing new projects, including a potential flagship property in Japan online in coming years.

So why aren’t investors snapping up MGM stock now? For one, as I showed, the earnings power can be disguised as the company earns money in streaks. It’s only fitting that a gaming company occasionally has streaks of bad luck, however, investors can lose sight of the house’s long-term advantage. In the time of coronavirus, in particular, it’s hard to see past the terrible headlines.

Corona Isn’t the Only Risk Factor

There are still plenty of risks to MGM. The coronavirus one is obvious, but it’s real nonetheless. Las Vegas is seeing rising coronavirus cases, and hospitality workers are complaining and in some cases even suing their employers for hazardous working conditions.

Other risks are less apparent. Consider that MGM brings in a quarter of its profits from Macau. In addition to the headline risks around China, you have the Hong Kong factor in particular.

Rising social tensions and political unrest threaten to ruin Hong Kong’s position. Hong Kong has long served as a politically-separate economic zone right next to China. However, as China increases its control over Hong Kong’s affairs, investors are pulling out of the region.

This, in turn, would be a fiasco for Macau. Don’t forget that Macau is a mere 40-minute drive or hour-long ferry trip away from Hong Kong. With the U.S. government talking openly about interfering with Hong Kong’s role in international finance, Macau could get pummeled as well as business travel to the region plummets.

MGM Stock Verdict

Assuming that the virus doesn’t spread exponentially again, MGM should do alright going forward. The stock is undeniably cheap in a world where things go back to normal fairly quickly. If you assume a baseline 2016-19 level of prosperity returns for the gaming stocks, MGM has a lot of upside.

This isn’t guaranteed. However, MGM appears to have made it through the worst of the crisis without running out of liquidity. It’s on the path to recovery, and the recent 30% dip in the share price offers a second swing at the stock.

MGM still needs to shore up the balance sheet when it can. And there are long-term concerns, such as the worsening outlook for Macau. However, with shares back down at $16, MGM is a bargain regardless.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.

The post The Second Wave Is Creating a Second Chance to Buy MGM Stock appeared first on InvestorPlace.

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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