Casino owner MGM Resorts (NYSE:MGM) is expected to release earnings on July 30. Year-to-date, MGM stock is down more than 45%.
According to the American Gaming Association (AGA), as of the end of March, all 989 commercial and tribal casinos nationwide had closed their doors. As I write, only 148 remain closed. However, with the potential second wave of the pandemic, it is not likely that these casinos will likely see close to full capacity any time soon.
For example, earlier in July, the AGA announced the cancellation of the Global Gaming Expo (G2E), the gaming industry’s top global event that would have typically taken place in October.
Put another way, there is still a considerable amount of uncertainty that will likely affect hospitality and casino shares in the coming months. For those who don’t already hold stake in MGM resorts, you may want to wait until you have more time to evaluate the earnings in less than two weeks. Long-term investors may consider buying MGM if the price falls toward $15 or even below. Here’s why.
What to Expect From MGM Stock After Q2 Results
MGM Resorts reported first-quarter results in late April. For the quarter, revenue fell 29% year-over-year to $2.3 billion. Earnings came at $806.9 million.
Adjusted losses, which exclude gains from real estate sales, came to 45 cents per share. Last year, earnings-per-share were 14 cents. Management also discussed the various steps it was taking to shore up the balance sheet. Its current cash burn rate was around $270 million per month.
The group’s portfolio of resorts encompasses 30 hotels and casinos. In the U.S., venues span from Maryland to Massachusetts, Michigan, Mississippi, Nevada, New York, and Ohio. Las Vegas of course has a number of resorts, making Nevada the most important state for the group. In China, guests can visit MGM resorts in Macau, Cotai and Diaoyutai.
In the quarterly statement, acting CEO Bill Hornbuckle said, “We are aggressively managing our cash outflows and strengthening our liquidity position to make certain that despite a lack of revenue, we are able to advance our longer term strategic initiatives.”
Before the release of earnings, on April 29, MGM stock saw an intraday high of $17.63. It fell below $15 following the report. But in early June, the shares hit a recent high of $23.84. Now, as I write, they are once again hovering around $17.60. Put another, they are flat for the quarter.
When the casino group reports earnings next, the Street would like to see how revenues are, especially given that China has lifted the lockdown before the U.S. Also analyzing the effect of the daily cash burn on the balance sheet in the rest of the year would be important.
Short-Term Volatility May Put Pressure on MGM
Since late-March, many stocks, including MGM, have in part been buoyed by optimistic views on the effects of the pandemic on our economy. We have just entered a busy earnings season. As a result, volatility has increased in broader markets.
As investors take time to analyze company earnings, they may also decide to de-risk. After all, many stocks have provided substantial returns for shareholders since the lows hit in March. For example, on March 18, MGM stock hit a 52-week low of $5.90.
Could it be that any potential quarterly good news from the hospitality group is already priced into MGM stock? If you also think so, then I’d encourage you to wait at least several more weeks before buying into the share price.
Are you currently an investor in MGM stock who saw gains due to the recent increase in price? Then you may want to ring the cash register and realize some of the profits. While long-term investors would like to see the price go to, and stay over, $20, short-term traders will likely keep it between $15 and $17.5.
Alternatively, if you are an experienced investor in the options market, you could also consider a covered call strategy with a one- or two- month time horizon. An ATM covered call position with August 21-expiry would offer some downside protection while enabling you to participate in a potential up move.
The Bottom Line on MGM Resorts
Markets have enjoyed a stellar comeback in recent months. Therefore, a large number of investors may soon decide to take some of their profits. In case of a gradual opening of these venues or a second wave of the outbreak, MGM stock’s recovery may take longer than initially anticipated.
We do not yet know what type of an economic recovery will come, both in Macau and Las Vegas as well as the rest of the U.S. Unless visitors and neon lights return, the rest of the year may not be too bright for MGM Resorts or its peers.
It may be several quarters before management builds the business back up. In the meantime, unfortunately for current investors, the MGM share price could come under further pressure.
Especially if a global recession is already here, then the worst may not necessarily be behind for MGM stock. Therefore, I wouldn’t commit any fresh capital to this titan of the casino industry just yet. However, a decline toward the $15-level may make the share price attractive for long-term investors.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education in the field, including a Ph.D. degree, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.