Chit Chat Stocks - MGM Resorts (Ticker: MGM) Not So Deep Dive

Episode Date: November 14, 2023

MGM Resorts International (MGM) is a leading global hospitality and entertainment company, with a diverse portfolio of resorts and casinos. Listen closely as Brett and Ryan go through the history, financials, and future prospects of the company. Enjoy the show! ****************************** Chit Chat Money is presented by Interactive Brokers. Switch to the best brokerage in investing today: ⁠⁠⁠ibkr.com/info⁠⁠⁠ ***************************** Subscribe to our Substack to receive free show notes and charts that go along with every episode: ⁠⁠⁠https://chitchatmoney.substack.com/⁠⁠⁠ Want updates on future shows and projects? Follow us on Twitter: ⁠⁠⁠https://twitter.com/chitchatmoney⁠⁠⁠ Contact us: ⁠⁠⁠[e-mail]⁠⁠⁠ Timestamps Company Background | (2:04) Industry | (18:55) Management & Ownership | (26:00) Earnings | (31:33) Balance Sheet | (37:24) Valuation | (40:12) Our Analysis | (44:01) Disclosure: Chit Chat Money hosts and guests are not financial advisors, and nothing they say on this show is formal advice or a recommendation. Learn more about your ad choices. Visit megaphone.fm/adchoices

Welcome to Chit Chat Money. On this show, hosts Ryan Henderson and Brett Schaefer interview industry experts and riff on the world of investing. As a quick reminder, Chit Chat Money is a CCM Media Group podcast. Anything discussed on Chit Chat Money by Ryan, Brett, or any other podcast guest is not formal advice or recommendation. Now, please enjoy this episode. Welcome into Chitchat Money. My name is Brett Schaefer, and I'm joined as always by Ryan Henderson. Today is our Tuesday not so deep dive episode, and we are continuing along in the sin stock month. Now, this one may be a little less, well, in some people's cases, they might think it's the worst sin but i listener here we're talking mgm resorts

last week if you're interested in tobacco stocks we talked british american tobacco and next week smith and wesson then i can never pronounce the name right but the spirits company biagio or diageo and then after that ultra group uh but we're talking mgm today that's going to be our casino focus it's going to be our maybe casino gambling entertainment focus it is a huge got a lot of sprawling arms here ryan's going to try to hit everything but i should say beforehand we're going to have a lot of charts graphics notes a lot of extras in our free newsletter that we send out on every tuesday episode so make sure to check that out uh the link will be in the show notes and yeah it's on substack chit chat money you can watch this

youtube spotify apple listen wherever i think that's it right let's get right into it ryan what does mgm resorts do uh this is gonna be a long one so hopefully you can try to cover all these parts as succinctly as possible yeah let's let's let's try it it's there are a lot of moving parts as you mentioned but But MGM Resorts, in kind of a single sentence, they are one of the largest gaming and entertainment companies for sure in the US by market cap, but really globally as well. A lot of the digital gaming operators are more expensive on a market cap basis, or they're larger. But really, if you look at it purely on land-based casinos, I think they're in the top three MGM resorts. And they basically separate their business into three parts.

So the first part, which is the most important and accounts for the majority of revenue, is Las Vegas strip resorts. So MGM operates 10 different casino resorts around the Las Vegas strip. These include the Aria, Bellagio, Cosmopolitan, MGM Grand, Mandalay Bay, Luxor, New York, New York, Excalibur, and Park MGM. Some of those may sound familiar to people. Anyone that's like a recurring Vegas visitor, maybe they recognize every single one. A lot of them are basically these giant luxury destinations where, and I'll talk about this here in a second, it's become more of a tourist destination as opposed to purely a casino, which is a little different than the regional properties, which we'll talk about in a second. But these assets in total account for 50% of Vegas's entire gaming market. And I will say there may be only nine different casino resorts in the Las Vegas Strip now because they sold one recently. So they tend to acquire and dispose of different casino resorts kind of basically, I'd say, at least once a year, it seems like. But in total, like I said, this accounts for half of gambling revenue in Vegas. MGM's assets do. However, the actual properties themselves do not earn most of their revenue

from gambling. They primarily earn revenue from their non-gaming segments. So 75% of their revenue in the Las Vegas strip resorts comes from renting hotel rooms, selling food and beverages. They've got kind of luxury restaurants located throughout a lot of these different properties, other entertainment and retail revenue. So you think like conferences, big events, they sponsor big fights or anything like that. All these supplementary non-gambling revenues account for three quarters of the sales at the Las Vegas specific properties. And I've got a little breakdown here on the revenue for anyone that reads our newsletter that basically just goes into where the revenue comes from. So when you're thinking about the Vegas segment,

it's not necessarily just the gambling. The big drivers are really like, and you'll see, they talk about this on conference calls. They talk about big events that are coming up to Vegas and you're like, okay, what does that matter for your gambling revenue? The big driver here is visitorship to Vegas. So high volume of traffic into Vegas means you're going to get higher occupancy rates at your hotels, most likely, higher ADRs, average daily rates. You're going to get more event revenues. So that's why they kind of talk about all these macro things that go on in the city broadly. The second segment for MGM that's important is the regional properties. So this is the second biggest driver of revenue, but in a normal year, it's kind of equal with MGM

China, which we'll talk about in a second. But this is seven different casino resorts located in various different markets. So these include places like MGM Grand Detroit, Beau Ravage in Mississippi, the Borgata in Atlantic City, and several more. However, unlike Las Vegas, the regional properties generate the majority of their revenue from actual gambling. So like I mentioned, where Vegas is kind of these luxury tourist destinations where you do a lot more than gambling. The regional destinations are more of your local, maybe we call them more addicted customers where they're actually typically visiting for the gambling themselves. So 76%- Yeah. They might just be driving by car. It's not like a destination per se.

Right. 76% of regional property revenues came from the casinos themselves. So it's basically an inverse of the Vegas revenue mix. And then the last thing I'll talk about here is MGM China. So this is the third reporting segment that they have. And this is technically just a majority owned subsidiary. So they own 56% of it. They have a partner there and it operates two casino resorts in Macau and Kotai. Both of those are huge properties. They're bigger than any of the Vegas properties in terms of rooms. However, if you're looking at the numbers, if you go to the most recent annual report and you look at the revenues, you'd think this isn't a very important segment because it's significantly smaller than the regional properties or any of the Vegas

properties. However, that's really been distorted because of China's lockdowns, basically limiting gambling activity and limiting people's travel to Macau and Kauai. So when you look at it on a 2019 basis. So looking pre-COVID, it was actually close to the size of MGM's regional properties in terms of revenue. And MGM China, across their two assets, generate mostly casino-based revenue. So slot tables, slot machines, gambling tables, stuff like that. And it's kind of a similar mix where only a small percentage of the revenue really comes from selling rooms and then food and beverage and stuff like that. But those are the three reporting segments. The last part I'll mention, which is becoming kind of a more important segment, I would say, is unconsolidated

subsidiaries. So there's a couple of things to note here. MGM used to own a stake in what was called MGM Growth Properties. So this was apparently considered, and I'm not really sure how the structure on these things works or what it necessarily means, but it was apparently considered an umbrella partnership REIT that owned all the actual real estate for seven of MGM's Las Vegas properties. So that was the one REIT owned all the real estate itself. And they sold their stake in that REIT to Vici, which I think is a publicly traded, if I'm not mistaken, real estate investment trust. And so now they've basically gone and all of their domestic properties. So every casino they own in the US is now owned,

the real estate is owned by Vici or Blackstone and Vici and Blackstone lease it back to them. And so basically MGM is paying rent every year to each year Blackstone and they have a built-in 2% annual price escalator or rent escalator. So basically, as long as revenue or EBITDA is outpacing the rent escalator, so EBITDA growth is outpacing the rent escalator, you're going to see improvements in margins. Now, I would say from the investor perspective, you might think, okay, this isn't changing much, but for anyone that's not in the weeds on all these types of I think sort of had an example like of a sale lease back before. They're basically raising a ton of cash by selling this stake to the REIT or exiting

the position, right? And they're going to have to pay it back as an operating lease over the next 10, 20 years, however long the contract is. But they're raising a lot of cash at the moment that they can return to shareholders. I think one of the years, and I'll make sure to have a chart of this in the shareholder letter they raised in a recent year, like $4 billion, which again, they can, it gave them a lot of opportunity to buy back stock, which we'll talk about later. Yeah. And the other segment here that's important in the unconsolidated subsidiaries is

BetMGM. So MGM technically has a 50% ownership of BetMGM with Entain, who is an online gaming operator based in the UK. They're the other 50% partner. And BetMGM, I think a lot of people are probably familiar with this. Maybe you've seen the commercials, but it's an app and a platform that offers iGaming and sports betting, depending on your, basically where you are. So today about 30 states allow for sports betting, whereas iGaming is really only legal in six states right now, I think. Someone said, I saw someone say seven, but I looked it up and it seems like it's, it looks like it's six right now. It's very confusing because there's all these different regulations. For example, our state allows the sports betting on the tribal casinos, but that's

it. And then you can't do it digitally, stuff like that. Every state is so different. It's all very, very confusing. Yeah. Anyway, last year, MGM delivered $1.3 billion in revenue and it's been growing like a weed. So I think in 2020, they were doing about $200 million in revenue. So it's up like sixfold in a little over three years. Part of that is because a bunch of new states have legalized it and they've launched in those states and they've gone after them with aggressive discounts, but now they're starting to see what looks like it seems like that business is turning profitable because they're starting to say their share of operating income as opposed to operating losses. But they think they could potentially get to 30, maybe even 35% EBITDA

margins on that business. They are currently third behind DraftKings and I'm guessing FanDuel in sports betting in terms of market share that's correct yep and then because they don't call out the competitor they just say like competitor one market share competitor two which whatever i think it's it's fan duel on draft kings yeah i mean fan duel is i believe owned by another publicly traded company and yeah they've done quite well with especially the relationship with the nfl and related media properties yeah and then uh mgm is actually the leader in i gaming but like i said only legal in six states, and it doesn't seem to have as much promise in terms of legalization efforts right now. So it seems like there's a lot more legalization momentum

state by state with the sports betting market. So that's where a lot of people are seeing the opportunity. The other thing, I didn't write it down here, but I think it's important to tie all this together is MGM Rewards is this loyalty program, which allows basically anyone that stays at MGM to earn rewards points. Or if you gamble on MGM, so say you gamble on a couple of local sporting events, you can actually earn points that you can then redeem later on on drinks or food or stays at actual MGM properties. So they have this loyalty program that really ties all their physical assets and digital assets together. So you're able to... Basically, it pays to stay at an mgm property and it's built up a little more customer loyalty than

vegas before they started to see all this consolidation so previously vegas was not very consolidated a bunch of like independently run casinos i think it was very like kind of run by the mafia i think i think yeah i'd watch i'd watch the if anyone needs three hours to kill watch the casino movie uh perfect airplane movie i think i watched on an airplane recently that is a it's a good overview of how maybe dirtier and uh more of the underworld of the gambling was kind of what they were but they talk about the end of the movie which was reminded of during the scuttle blurb write-up uh that i believe was this year maybe last year uh that we'll link to in the show notes uh some of that analysts that

we follow and subscribe to the in the in the end of the movie they say well the whole thing got torn down and then these corporations came in and they really corporatized and it made it family friendly. And you're like, and he says, it's like, it's a bad thing, but it's okay. Now the entire country can go and have fun and spend money. So the business has really changed over the last years. And maybe I'll talk about, or we'll talk about at a later time in the episode, the potential that it changes even more with some of the developments in the next decade or so. yeah i agree and there's a lot going on in vegas right now but let's talk briefly about the history i'm not going to spend too much time here because it's kind of mgm resorts history is really kind

of boring if you look on their wikipedia page basically you're just going to see acquisition disposition acquisition disposition and oh they sold the property or they financed 50 of the property or whatever and lawyers love it though right lawyers and the bankers they're like this is this is one of their cash cows the the las vegas strip yeah but i'll give kind of the genesis of the company for anyone who's actually interested in that um so mgm resorts roots date back to 1969 a guy named kirk kirkorian i've never really heard of him until now uh he was a casino and airline mogul at the time. He bought a controlling stake in MGM Film Studios. However, a couple of years after he purchased his stake, he was also struggling with his personal debt

on the casino side. So he had to sell his casino company then at the time called International Leisure at a big discount to Hilton Hotels. Well, that integrated casino and resort that Hilton built. Well, he built it, but had to sell it to Hilton, became the most successful hotel in Las Vegas. So after seeing that, Kerkorian decided to lead the film studio into the casino world. So in 1973, they opened the original MGM Grand Hotel and Casino. They continued expanding these hotel and casino operations across different locations. I think the next one was in Reno. and by 1979, it had become really quite a big profitable operation. So they decided to split the company into two. So if you're wondering if there's any kind of relation between the two MGM

brands, yes, there is. That's where they dated back to. But since then, like I said, it's been 40 years of acquiring and disposing of various casino properties. A lot of it's not that relevant because I already talked about the properties that they currently own, but the most recent activity, and this is maybe a little more relevant, has been that MGM is raising capital through a number of different initiatives. First of all, they sold, well, they bought the Cosmopolitan, but they also sold the Mirage and they sold their Gold Strike Mississippi Casino. And they've sold the land on their Las Vegas properties, all raising a bunch of cash and using that cash to buy back stock. Spoiler alert. Yeah, they bought back a ton of stock in the last

couple of years. I'm trying to think of any... I guess when you look at the year-over-year numbers, there's going to be a lot of lumpiness when there's a disposition or an acquisition. So they give the adjusted numbers, don't take the revenue at face value, just focus more on the same venue sales. That's the more important figure. Yep. And then when comparing to 2019 numbers, I think this could be one, and this is maybe the opportunity or what's tricking investors that are optimistic is the inflation is definitely going to have an impact. So if you're saying, oh, they're doing way more than 2019 or, oh, they can get back to 2019 numbers. This is definitely an inflation adjusted business on

the operating side. And yeah, that can hurt them on the capital expenditure side, but definitely don't say like, oh, they're way over earning from 2019. That means they're going to have a pullback here. Chitchat Money is brought to you by Interactive Brokers. But we'd like to call them by their ticker symbol, IBKR. Designed for active traders and sophisticated investors, Interactive Brokers offers trading assets in 150 markets with 27 different currencies, charges USD margin loan rates from 5.83% to 6.83%, rated the lowest among margin fees, the ability to trade stocks, bonds, options, futures, commodities, and more with high interest rates paid on instantly available cash balances, and the ability to lend your eligible stock shares

to earn passive income all on one single unified platform restrictions may apply for more information visit ibkr.com member sipc open an account with ibkr today let's hit the industry in competition with all of its tentacles mgm has exposure today to really the global gambling industry both in person and online uh globally the entire uh gambling and lottery industry is expected to be about 1.4 trillion dollars by 2030 now these are rough estimates so just say it's sizable but if we exclude lottery that brings it down to an estimate of about 800 billion dollars for 2030 and then if you exclude asia which i would just say to separate it out because there's a big difference between MGM's dominance in North America versus

kind of these exploratory, you know, the China business is separate, but there's the Japanese stuff and the Middle East stuff that we'll get to. If you exclude Asia, that gets you down to around $300 billion for a global opportunity, which is really for them, just North America. And then they are pushing that MGM into Europe. So maybe TBD there. question maybe halfway through this segment how do you think about valuing mgm's asia opportunities including the potential for these resorts slash gambling empires in the middle east i haven't really thought through how to value them specifically i know well it sounds like it's a massive opportunity so i'm not necessarily upset that they're investing there especially like

the mgm china when that thing's rolling is their two properties generate just as much revenue as pretty much all of mgm's regional properties which sucks because i i kind of think that i i would i don't know either i i kind of want to write the mgm china business to zero just for margin safety concerns just because of the governmental influence but obviously macau is huge yeah the thing is like you can also take it out of the enterprise value like uh a lot of the debt is specific to mgm china so if you're writing the asset value to zero i guess you could write the mgm china debt to zero so kind of offsets a little bit there and then i like the japanese uh plan that they have it's nice that they're getting some uh they've gotten approval now from the

government there to develop i know it's going to take forever before anything shows up in the financials but it seems like a great kind of market to to try out uh and then the dubai or the uae initiatives i think it's a little too early to sell it's probably worth zero right now like in terms of like actually valuing it um yeah but i may be more optimistic on middle east but i'll get to that in my future growth opportunities yeah they just haven't gotten this if i i can't remember did they even get approval they haven't but again uh that's just a tease for my future growth opportunity i think it might be imminent and they might have a inside scoop there uh but back to the industry um and i will say the japanese one does look nice too those renderings

don't let it trick you but they do look beautiful and it's supposed to be the most maybe be advanced, intricate, luxurious, as you might say, casino resort in the entire world. So another way to look at this, though, from an industry perspective is MGM as one of the most dominant players in the Las Vegas Strip, where there's a lot of money to be made, is kind of betting on the growth of the Las Vegas GDP, so to speak. I think one interesting note is the explosion of sports in Vegas over the past decade as it's gotten more family oriented, corporatized, as we talked about. So you have a hockey team there now. You have an F1 race that I think is actually this weekend.

You have the NFL there, National Football League, and then probably a baseball and basketball team coming at some point this decade. There is a baseball team that is maybe closer along the lines. Yeah, the Oakland team is supposed to transition over. And I will say just why is this important? Because I think people can talk about the visitor stuff, but just thinking about the Oakland team, which is in the same division as the team that I follow, if they had a weekend in Vegas for a three-game series,

that could be kind of fun to go to, right? That's an incentive to go down to Vegas, and then you're spending money there. Another huge one that's probably even bigger than this F1 race is the Super Bowl is going to be hosted in Vegas for the first time ever this year. and will likely continue to come back, I would say. It's going to be one of their core places to have the Super Bowl.

Even bigger than that, there's rumors that an MLS team could be going to Vegas at some point. How could I forget? I'm surprised they didn't talk about that on the conference call. I don't think it's confirmed. Well, I think at least the most recent bid went to San Diego, so I don't think there's any proof that it'll end up in Vegas. I guess there's too many teams already, so they need to hunker down.

Too many numbers there. But, okay, what are your thoughts on the sports tailwind? I think it's legit, not to mention you have a massive rise in sports betting overall. So at a time when there's a bunch of sports betting going on, I mean, it's always been legal in Vegas, but I think it'll probably spur more sports betting just on the Vegas teams.

um i think it'll drive traffic like you mentioned especially stuff like the f1 events and i think it makes it more family friendly so like yeah i can be rich rich family wealthy family friendly yeah like let's say you want to go to whatever uh like a hockey game you're a big hockey fan maybe you're like a minnesota fan or whatever you can fly out there and you can stay at like one of the non scandalous hotels or one of the ones where it's like a lot of like actual family friendly events and you can go to games as opposed to the other types of experiences you get in vegas which maybe 30 years ago you might not have been able to do that i just generally when you get a bunch of more family friendly events i think you're going to drive continued visitorship

growth to vegas yeah and the key for them is there's a fixed amount of hotel rooms and if can price it on average 500 instead of 400 that's pure margin for them so the operating leverage on that is vital i will say the last thing on the industry and sector here is that sports gambling pretty important as a tailwind revenue expected to be pretty explosive at about a 20 compound annual growth rate this decade but market participants have been extremely aggressive to try to grab share so it's been unprofitable however this has changed last quarter i think was their first one i believe they mentioned this on the conference called the first time that mgm was profitable on a segment basis so that's nice um yeah all right management ownership they're run by william

hornbuckle that's a great name he has been with the president of mgm since 2012 coo since 2019 and then CEO after that. He has overseen the sports expansion, online betting, these new Asia bets for the company. So pretty good track record. He's got a lot of the stuff they're working on. You can trace back to him. And then the other important thing is those are the kind of capital investments. Now the capital returns is the other side of that coin. The CFO is Jonathan Halkyard. He has been on the job since January of 2021. And he has been in charge of some of these leaseback deals and the share repurchase program uh i did say check the shares outstanding chart below but i forgot to paste it will be in the newsletter uh if we look at the last

five years down 35 yeah 35 for one they actually didn't have to raise during the pandemic which was nice and then right when he took the reins it's been down 30 basically since the new cfo came into play. So that's his MO. They've talked about it time and time again, prioritizing repurchases over dividends. To each his own. We like repurchases, but that's kind of what just information for any prospective shareholder. On an ownership note, IAC owns a roughly 19% stake in the company. However, they've been also adding to the position and that stake increases as the company repurchases shares and they don't sell. Should have a disclosure here just said this at the start i own shares of iac so i guess technically i own shares

of mgm through the you know pass through stuff so i should say i do have exposure to this company do we like iac as a big shareholder and board member here not particularly i mean would it be surprising to you if in five years they no longer owned it no longer own their stake they constantly dispose they're known right for selling their stakes and they're usually not long-term owners of businesses so I don't know I mean it's probably just going to be selling pressure at some point which whatever if you're long term who cares but because you can just buy through that but I would imagine I think it's if you're out in years that means the stock's probably at two three four x so if they're out in five years

or they need the cash yeah but if you look at ic they don't really so uh i i guess i haven't looked at i seen a little bit but given that the i don't know they might feel pressured from shareholders to do something else with that stake even though it might be the the best allocated capital yeah but all i should say any commentary from ic there's been no commentary that they're going to sell but again they can change their mind i think it's a good thing like they probably help with that mgm that was one of the reasons they joined is they wanted that as kind of a strategic advisor there and i think maybe that mgm would have been successful about them but because you can't kind of can't do a uh whatever you call that i'm forgetting the term

right uh you can't rewrite history there but since they are there and bet mgm seems to be the one successful legacy player in the online gambling space i think that's a good sign it's not a huge difference though i would say does it change much no you maybe think about it mgm is more important to IAC, then IAC is the MGM at this point. Now, if we go to executive compensation, all this stuff is rather disappointing. They don't really talk about per share stuff, free cash flow or anything in the proxy. And this is a business with a lot of CapEx and really is a true return on invested capital company. The executive compensation metrics have been changed a lot in recent years, which is a tough sign, not a good sign. They did have the

pandemic but sorry like your business is hemorrhaging money you don't deserve bonuses generally they are valued these executive compensation metrics are valued on adjusted EBITDAR which is just EBITDA with an R on the end which I believe is rent that's quite nice adding back something else and then there is relative and absolute total shareholder return And I guess absolute total shareholder return is nice, but relative also not a good sign here. So proxy, not that great. But what's interesting is that even though the inceptives don't seem to be that strong, they are doing all the right things, buying back stock consistently, or things we like, buying back stock consistently, focusing on some promising investment opportunities. So what do you think? Would bad executive compensation or basically a bad proxy keep you out of this stock? Does it matter to you?

It would if they didn't have the massive buyback in place. But given that they've been so kind of religious about buying back their own stock, I kind of shrug my shoulders. It's a bummer, but clearly it hasn't stopped them from doing what we think are the right things. So yeah, it doesn't necessarily, it wouldn't, it would not be, uh, it would not prohibit me from buying shares now. Yeah. Their actions have been pretty good. Uh, okay. Earnings, Ryan, what do you got here? It's a bit complicated. Um, and, but maybe this is where we'll hit the cybersecurity stuff too. Yeah. Really complicated, especially now with the cybersecurity disruptions. So in the last 12 months, they've generated $15 billion in

trailing 12-month revenue, basically $5 billion in that EBITDA, but as a shareholder, there's not much usefulness there in terms of that EBITDA figure. A little over $2 billion in trailing 12-month EBITDA, which translates fairly well to operating cashflow. However, pretty CapEx heavy business. A lot of it's maintenance CapEx too, just retrofitting existing facilities. I think the MGM grant is like, what, 30 years old, last time they did renovations on it. So there's a lot of maintenance CapEx related. So if you look at it on a free cashflow basis, $1.5 billion trailing 12 months free cashflow, according to, I used Coifin for that. But I think I've seen numbers from Scuttleblurb, which I think is a really useful analyst to follow, where he assumes

maintenance-free cashflow basically at a little over a billion. If it's a billion, 1.5, anywhere in that realm, they're generating a ton of cash to use to buy back stock, which if you're going to talk about the valuation here in a second, it's a lot relative to their market cap. So like I said, a lot of lumpiness there. There's also a lot of cash in the door that is not necessarily operating cashflow. But I think if you just kind of assume, let's say you take that operating cashflow line and you kind of assume that anywhere from 500 to a billion will be used for CapEx, you're looking at probably about one to 1.5 billion in free cashflow and probably more as that operating cashflow line continues to

climb up. But in the most recent quarter, let's talk about more like the trends of what's going on. So for starters, China's booming again, which is nice to see. A lot of that is purely just from the reopening, but they're even booming at a time when there's been concerns about the economy in China and consumer spending, but it hasn't seemed to really affect the Macau destination at least. And then they had a cybersecurity issue this quarter where I want to say for like, I don't know if it was a week, but for a while. Maybe longer, yeah. MGM Grant or a number of their properties, which all around the same system were down, which makes it really difficult to run these properties, given that a lot of it is like digital, you know, key cards, access to rooms, like bookings, all that stuff. Like you can't track all that.

you don't track all that stuff manually anymore. So it's really hard to run a company when you do that. They said it hurt margins by about 200 basis points. But if that didn't happen this quarter, you would have seen really good growth out of the Vegas properties. There's a lot of demand right now, a lot of travel going into Vegas, pretty strong. It's nice when you're one of the only options too right yeah i mean basically so let me make sure i can pull up the numbers correctly but if you strip out so even with the one week of i'm not even sure if it was a week i think it was like a week of downtime um for those vegas properties and regionals same venue metrics were same venue revenues, we're down 2%. So if that's kind of worst case scenario where everything feels like

it's kind of offline for a while and you're only down 2% and a quarter, I think that's pretty solid. It was down 8%, but that includes the dispositions or the sale of, I think, the Mirage. So basically tons of demand going on right now. The regional properties are a bit lackluster. They're just – that's really dependent on gambling revenue as opposed to tourism, and it seems like people are gambling a little bit less. I mean, it's still doing okay, but there's just been a little bit of weakness there. Really, I think just kind of looking at this, I think the path to $2 billion in free cash flow is definitely there. It feels like unless something really happens in terms of Vegas visitorship, they're going to continue to see revenue growth climb, average daily rates look really solid, occupancy rates look really solid, and MGM is finally profitable and continuing to grow. So I think they're in a really good spot earnings-wise.

I don't know. Do you have any takeaways? I mean, it's really complicated right now just because of all the one-time stuff. But any thoughts? Yeah, the Vegas businesses seem good. We'll talk. There is some macro issues here. I will note they just signed the union agreement with their labor union, which is good.

Culinary. Culinary union. Yeah. Yeah. Yeah. I think a lot of employees, and I should say specifically for the Vegas Strip, so the most important segment, we'll look into maybe what the points of the deal were. I think you maybe get more information. We'll get more information on that because it was signed like yesterday. So we'll get more information on that in the next few quarters, but they have something

else to track just for their expenses. All right. Let's talk balance sheet. it's a bit complicated because some of the debt is not domestic. But if we just look at the asset side of things, $3.3 billion in cash, cash equivalents, they generate roughly $5 billion in EBITDA, like I mentioned, just over $2.2 billion in EBITDA. They have $6.5 billion in long-term debt. It's all due within the next five years. Pretty much all of that is fixed rate senior notes, the weighted average interest rate is between 5% and 6%. But only about $3.25 billion is domestic. So the remaining notes are due in MGM China, or it's specific to that subsidiary. And as we kind of mentioned that earlier, they don't look at that, I guess it's

true debt. So on the conference call, you'll see them mention, even though they have $6.5 billion dollars in long-term debt and just $3 billion in cash, they say, we have no net debt. And so it's because they kind of look at it on a domestic debt basis. To be honest, I'm not sure about the details of how that debt works or why they kind of ignore the China debt. But they also look at when they are calculating their leverage ratio, they use the, what should going to call it, the rental commitments. I'm trying to think of the term there. Basically, the rental commitments or the rental obligations, they look at that as a part of the leverage ratio.

So they say they target below four times as kind of their max leverage ratio. And right now they're at about three and a half, but I wanted to steal this quote from the conference call because the CFO is not against adding debt right now. Here's a quote. He says, we've been aggressive repurchasers of shares. I will say that at these levels of trading in our shares and the value that we think is in there, we would certainly consider taking on some additional financial leverage in order to enable further share repurchases. So you could probably expect them to take on more senior notes right now. It seems like they're probably getting around my guess would be probably six percent somewhere in there six to seven percent

notes uh probably it depends on the year of course i'd say higher given their ratios yeah i don't know what the most recent i mean i'm looking at all the recent fixed notes and my guess is they've refinanced some of it and they're all between five and six yeah but i think that was probably before the interest rate hikes yeah i guess i probably should have looked at issue in states but i guess with that let's let's talk valuation because this is where it gets i think really interesting yeah and the way i want to do it might be confusing but i think it makes the most sense to me um if you want any investors welcome to do it differently but first i am going to value the china business at zero or i'm just

going to exclude it. If you don't do this, I think you're maybe being, well, if you're just not skeptical with the China business, I think you are just not being honest with what's going on in that country. Just look at the recent history, look at what the government's doing, look what they're saying, look at what, I mean, just everything. And also Macau is nowhere near my circle of competence. I don't know anything about Macau. I think I would like to think that Vegas is pretty easy to understand just as a domestic person who's been there, but Macau, I don't understand. So I'm not going to value it at all. If it's worth anything, hey, that's a nice little cherry on top. Second, I'm going to exclude that MGM. Also, just sign a little

call option there. Maybe you say it's worth 500 million today. Maybe you say it's worth a billion dollars. Who knows? But there's the potential there. I'm going to exclude it. Third, and this is where it gets complicated. I took, so basically get the earnings. I took the segment EBITDAR for regionals and Vegas, and then added them up over the last 12 months. And then I subtracted stock-based compensation and corporate overhead costs. I know some of the corporate overhead costs and those other expenses are for the other businesses, but just kind of to be conservative. And then if you go on that with their enterprise value, which I did not include the operating leases because I think that's the right thing to do, you get an EV to earnings of 4.2. But you

might be saying, hey, they have a lot of capital expenditures, right? And they also have a lot of interest expense. So I subtracted the trailing 12 month interest expense, and then also subtracted their $600 million in guided maintenance capex, which I like that they gave out. And if you do that, it's still not that bad, you know, still pretty cheap, EV to earnings of 5.8. Does that makes sense ryan anything did i explain anything weird there no i uh it might have been a little hard for people to follow but even if you look at it purely on just like an ev to free cash flow basis like by the book so just reducing out property and equipment additions or all capex it's basically sub 10 times probably eight roughly eight times so and they're committed

to this buyback i think at more than a 10 free cash flow yield i feels like this is spoiler alert feels like there's a really good opportunity here yeah the i i don't know about the operating leases, people will say, oh, yeah, those are long-term commitments. You got to put that in there. But look, for anyone that thinks that, should I put long-term employee contracts in there? It makes no sense. And they have the 2% rent escalators, which maybe there's changes in that contract where that could, or there's parts of that contract where that could change. But I would bet that inflation is going to be higher or at least 2%. So I don't think that's a big concern as if like an operating obligation. So yeah, didn't include the operating leases.

If you look at some of the aggregators, they will do that, and they'll make the enterprise value much, much higher. But I had an enterprise value, and I include the MGM China debt just to be safe, just as a margin of safety. It doesn't mean that much, but I have an enterprise value as of this writing at $16.4 billion, just for anyone that's wondering. Okay. Ryan, anecdotal evidence, what do you think here? Well, I think if sports betting was legalized in Washington, I'd like to think that I wouldn't do much of it. but maybe i know maybe you could be i mean talk about inefficient market mls like you could i actually think it's so random i went to soccer stuff i went to uh one of the ones on the uh

uh one of the native american resorts um or not resorts but i guess it's a resort but one of their casinos that's local to me and looked at sports bets and it's all just, they make it quite tough to, to really. Soccer is too hard. Yeah. And those are the ones where I always think like, man, I'd really have an edge here, you know? And then like, I just miss on all of them. And like the person that's like, Oh, I like that name. I'll, I'll, they'll score. They hit or whatever. Anyway, but no, I,

I do think that if sports betting were legalized here and you could just do it from your phone, I hope I wouldn't do it that much. But if I did, I would probably use BetMGM. I know DraftKings is popular or whatever, but I find it really appealing that you could just become a rewards member and actually earn money for stays and food and restaurants. That's more appealing to me than incentives for further bets. um i'm actually booking a stay for vegas right now like in the process of it six months out and

it would lock me in like if i were sports better here and i had the points i'd be staying at mgm like i think it's a really good ecosystem tie-in yeah it does make sense like someone like myself that's not a vegas stayer um or i don't know visitor it probably doesn't make sense to me but there's a big chunk of the population where this probably could be a competitive advantage all right uh i mean my actual evidence is the brand's good pretty simple good brand yeah and it's honestly important like it kind of or at least to me it's like luxury brand mgm is a luxury brand i think of it that way which kind of makes it feel like nice to stay there you know i think that would translate well internationally too would be my guess so i just

yeah lots of well i've anecdotally i feel like mgm is a good business but you're gonna have to stay at one of the one of their properties there's only like three companies that you can really stay so you better stay to get yeah they're all consolidated into like the wind caesars or uh mgm again i checked when's gonna be not it's too much wins yeah wins far more luxury mgms like it's kind of that perfect balance where it's like the flights to vegas are so cheap because they want you to get there and then the stays at a place like luxor which is like luxury but not that expensive like it's very reasonable i don't know it's kind of the yeah great experience it's not unaffordable yeah if you like yeah if that's your like i don't know if that's your

vacation then it's it's they don't get you on that is what we're saying yeah that is true if you like a cheap vacation and you know you won't gamble then this is a great place to be yeah why would you do that uh i don't know but if people like it people like there's some people that do like that all right future growth opportunities speaking of international that's what we both have so why don't you hit yours first ryan and i am seeing the beautiful rendering reminds me of some of these space economy companies uh of the japanese resort yeah i usually don't want to invest based on any renderings but i'm going to talk about the osaka resort so they just received basically this has been in the works for a long time it'll probably

remain in the works for a while, but they just received approval to begin building one of Japan's, maybe if not the first integrated casino resort with a partner called Oryx. I think it's a 50-50 partnership. The project is estimated to cost $10 billion in total, which MGM would, it's expected that they would basically be paying $2 billion worth of that. The remainder will be, I think it's scuttle blurb was describing this as sort of a 40 40 20 type of partnership where there'd probably be like a third partner that comes in and as well as dead beautiful in japan doesn't cost anything true uh so they'd also have the dad so about two billion dollars worth expected to kind of be laid out by mgm maybe it'll end up being more who knows but it will likely be the

most expensive casino ever built. I like the idea of the Japanese demographic as a place to go after just because they're higher worth. It's not like you're going after really cheap clientele. It'll be a luxury experience too. So it could be a tourist destination also. But I'm going to steal some of Scuttleblur's work here and we've linked to his write-up and we think the subscription is well worth it. He's a brilliant analyst, but he basically says, so maybe on a $10 billion investment, the Osaka Mega Resort delivers something like $6 billion of revenue, $2 billion of EBITDA. At eight times EBITDA, MGM's 50% stake is worth $8 billion. Basically translates to $1.2 billion in incremental equity value. That's a decent chunk of change on a $13 billion market

cap. Once again, he used... I can't remember. I think there was either a Japanese... It wasn't a Japanese resort, but there was another resort where you could see the year-on-year return to Singapore. So anyway, this could be a super useful asset, huge resort, obviously the world's most expensive potentially here i like the diversification out of macau too just because of the china risk i like the diversification in general too because it's not like away from macau that's definitely positive and then also even away from vegas even though vegas has been like a huge growth market you don't want you know 80 of your revenue coming from vegas because on the half chance that visitorship starts to decline you know they're at risk so i like that

stock price during the gfc yeah yeah plus the rendering looked pretty cool so it does look good it looks it's got a lot of those uh the cherry blossoms quite beautiful so with my future growth opportunity there's a lot we could include here there's the sports debt kind of for the vegas strip there's bet mgm we've talked about that but i think one that might be under followed um also might be underappreciated by investors is the potential of Dubai or really the UAE to legalize gambling in the country. There was a report that the UAE legalization is imminent and all the big players on the Vegas Strip, MGM, Wynn, and Caesars, I believe are the ones they were referring to in this article, have hotels and basically a resort like the ones they have in Vegas, but built for

that market. And then they just have everything there except the casinos right now, but are prepare to launch a casino whenever legalization comes down. I mean, it's going to take a lot of years, but if they get the green light here, it could be some major growth. I think part of it might be a partnership. Don't know exactly the rules here. Yeah, it's a little bit like China where the government structures and the legal stuff might not be as attractive as an investor. You might get a little worried here, but maybe a little less than China. That could probably be a concern um and then i would take the quote from or excuse me this quote from the conference call and maybe just think about it however you want this from the ceo when asked about dubai quote

obviously we've got boots on the ground i think you all understand our former ceo is now chair of the gaming commission in uae so they had some inside scoop there and i think that is saying that eventually legalization is coming to the UAE. And it's nice, you know, the Japan one probably won't be operational until 2030, but over the long-term, they can probably have in some of these areas, can invest a lot of money

and earn a good return on that investment. Okay, highlights, lowlights, Ryan, what'd you like? What'd you just like here? Highlights for me, I mean, I think the rewards program really ties together their physical and digital assets in just a very seamless way. And I think it gives them a massive advantage

really on the digital side over peers because that's something very different that DraftKings and FanDuel can't really sell, I don't think. I'm not sure who FanDuel is owned by and I don't know if they have any physical assets they can cross-sell to. But I think it just gives them a leg up

in the iGaming and sports betting markets, which even though it was kind of a bubble two years ago in terms of the market caps for some of these companies, it's a huge growth market. And there's still lots of legalization to go, I think, with sports betting in particular. So I think they're well positioned there. And then over the last 40 years, visitor attendance has consistently trended up to Las Vegas. If you just look at the last, I can't remember the website, but basically there's a Las Vegas visitor tracker and it's just consistently trended up.

COVID threw a wrench in it, but it seems like demand's really bouncing back. All the sports teams going there makes it feel like there's going to be momentum in terms of visitorship. I don't see any reason why that trend wouldn't continue. And then third, management team seems very committed to the buyback. The shares outstanding are down 35% in the last five years. I think that's a testament to not only does management think the right way, but are they willing to be aggressive when the time is right? And they really are. I mean, they did it

during COVID. They're doing it now. They're pushing leverage because they see the opportunity to buy back shares at what they think is really attractive, which makes me pretty optimistic seeing how confident they are in their buyback right now. Lowlights for me, cost inflation is a risk. Maybe there's some margin compression. They do have to deal with unions. I think a majority of their employees are on collective bargaining agreements. But still, I think they can push a lot of that through. The other low light for me, China risk, obviously hard to know what their assets in China are worth. And then even though I think it's been a tailwind and probably will continue to be, there is a lot

of concentration risk just in the fact that their most important properties are in Vegas. And if anything were to happen to Vegas visitorship, it would not only be a headwind to revenue, but probably have an increased or an even outsized headwind on margins. So the more they can kind of add resorts internationally around the globe, I think the better. Yeah, it's quite interesting there. And I will say that's my big lowlights as well. Maybe I'll talk a little bit different. The China stuff probably don't have to go into again, but the cyclicality stuff may well hit as a combination with the buyback.

So my highlight, they have a consistent buyback. And since they turned things around in 2021, especially with this new CFO, who seems to have a good track record, and you add in these leasebacks, which is those real estate transactions. And I think the finance team has done a great job. And that's a big highlight for me. Then conversely, I think they're being a little too aggressive with the balance sheet. You know, the gambling industry is a bit cyclical, and maybe not even say the gambling industry, it's more of their market can be cyclical, because there's a lot of operating leverage in basically the Vegas operations, where if visitors, as an example, go from 12 million, down to 10, down to 8 million, that's probably a stark example, but that's not the actual number. And then you have the same amount of rooms, well, you're not going to be able to charge for that much or your occupancy is going to be quite low.

and that could happen during a deep recession we just don't know and you know i might rather have him at this moment build up some cash in order to have a more conservative balance sheet or at least be a little more don't buy back as much i would much rather have them build up a little bit more of a cash position here because if and when the economy goes into a downturn whether it's next year, the year after, five years from now, 10 years from now, I would rather have that and have a lot of cash to repurchase shares at what will be a cheap price then. Because if, say, for example, and people have been calling this since 2022, if the economy goes into a recession next year and consumer spending goes down, Vegas will probably take a

hit. MGM stock is going to go down. And would you rather have a buyback now or then? I think just a little bit less aggressive might be something to consider because yeah if things go right okay perfect they're buying back stock right now it's great but it might not go right for the macro environment uh let's see other highlights i think generally the growth of growth opportunities are great i think you combine into the sports and events and stuff in vegas the long-term tailwind of vegas is there then you have the international stuff japan dubai I think maybe there's others. I can't remember.

And then online gaming. All those might not work out beautifully, but I think they should benefit from kind of the tailwind of gaming globally. They got a lot of irons in the fire there. And then I think the operations have a good inflation hedge from a consumer spending perspective, but that kind of just balances out the negative of being heavy labor and heavy capital expenditures. All right. bull case ryan what do you think

it's a little tough because there's so many moving parts but well just simply i don't think a lot needs to go right for this to be a really good performing stock the as long as some combination of drivers gets you to five percent plus revenue growth in Vegas. China looks like it's rebounding pretty quickly and the regional properties just continue to earn what they're currently earning. They can plow tons of money into buybacks with that formula right there. And I don't think that's too unreasonable that China kind of gets back to 2019 levels. Regional properties stay flat and Vegas grows gradually, at least grows a little faster than its rent escalators i think they're in a really good position if that happens and

you're probably getting 10 plus at least returns yeah it's kind of yeah like interview value the china business is zero which again the mgm china is a separately traded stock i should say so that's kind of why it's a separate entity for them it's a weird it's very strange but let's just exclude that if the operations for everything else just stay what they are doing you're gonna make money now the bear case though what makes it tough about this one is as a big consumer discretionary company well the economy does matter a lot so ryan what do you have for your bear case yeah basically what you just said if if uh visitorship to vegas declines i think that's where the downside comes from not really sure what would happen that would cause

that but look at the great financial crisis well yeah i mean certainly big recession probably hurts visitorship but i'm i feel like we say that a lot on like our bear case like what happens we get to the end we're like oh big recession hurts this company it hurts everyone disproportionately probably hurts them more but yes yes that's what i would say yeah still it doesn't wow i guess it never feels like it's gonna happen but it doesn't really feel like that's happening right now it feels like consumer spending has tightened a little bit lately um on travel and they're still doing just fine um but i don't know it doesn't feel like there's that much downside risk here all of it kind of comes from like vegas visitorship

which from everything we're seeing right now feels like it's going to go up based on all those sports that are going there uh there's some other stuff too if i'm not mistaken oh just family friendly stuff basically all all getting put in there that makes people feel inclined to visit the sphere that's what i was thinking about sphere feels like like a they don't yeah everyone wants to everyone wants to go visit i know but it brings people to vegas i guess i guess yeah wish they owned that the thing's cool but yeah it's a tough one because uh you know because predicting consumer spending is tough everyone almost always gets it wrong but it will affect them i think the bear case is okay over the long term there's really not a bear

case to their brands or vegas outside of like some energy crisis or something like that or water crisis right which people talk about may probably don't have to talk about in this podcast but maybe research it if you're really interested in this company because over the long term through the economic cycle they should be fine i would think the bear case is the economic cycle plus them not managing the balance sheet correctly because they are being aggressive yeah they're writing a bit of a thin line but not really if the debt's all to mgm china like if they're if they are in a net cash position right now then it's not really that thin of a line that they're writing unless they turn into like yeah if they start losing money which it seems like it would it would take quite

a step back in the economy for them to start losing money sure uh yeah i mean they lost money let's get a little chart here great financial crisis 2017 2018 i wonder if that was weird and And then, obviously, COVID for a short time period. We're burning free cash flow. All right. I think that's it. Final thoughts. More or less interested, Ryan?

I should say I technically am more interested because I own shares of IAC and they own shares of MGM. So, technically, I guess I have to be. Yeah. I'm more interested for sure. I think I would rather own MGM straight up. than on IAC. Yeah.

We kind of, we've disagreed on IAC in the past, so not really an IAC show, but I think I would not be opposed to getting exposure to MGM through an IAC stake, which we've done before, but now you get what, it's almost 50% of IAC's market cap, right? Yeah.

The market is either a discount. It's kind of a weird way to look at it because the stock price has changed, right? It could totally change in two, three weeks. But yeah, it's a big part. I see for sure. At the moment, I don't have the numbers in front of me. More interested though.

I like it. Yeah, I'm more interested. I think it's a great business in many ways, but because it just has such a competitive advantage versus everyone else, there's really... Who is going to throw in them? No one, but the brand.

these brands right but i think they're a bit weaker in other ways because the heavy capital expenditure needs and the reliance on you know there's a lot of labor i do not like that generally as a shareholder well it just doesn't make it as good of a business you know what though i used to say that i used to say i don't like the labor-based businesses where you might have a big rising costs but after looking at so many like software businesses where they have to pay exorbitant amounts in stock-based comp i almost i wonder if i prefer the labor-based businesses i don't know if they if they sign this contract and it has a four percent annual uh salary increases and then we go into recession i don't know how much you would like it

but it's only with the culinary yeah i guess i haven't looked deeply into the unions maybe that's not look it's not i don't think it's a like i said there are some downsides to this business model all else being equal capital expenditures like heavy capex is just worse because i i hate i don't like the people that argue about that it's all else being equal if the mode is equal if the tailwind is equal yeah less capex is better sometimes capex can equal a note though that's what i was gonna say especially in a situation like it can't indicate it but i think it's already there though yeah the well the maintenance capex whatever but i think it's a differentiator like no i mean what like that that's maybe not maybe it's improving the

but i think the capex has been one of their advantages they've spent it well and created these massive properties that people are willing to come visit yeah and there's only yes and there's only certain like that spot on the vegas strip you can't you go way farther down or up it it's not as advantageous it's clearly got a competitive advantage but i'll let that uh investors can think about that hopefully after listening to this one next week we're going to be going for maybe well i guess it's everyone's personal opinion but this would probably be my number one if you're going to list the sinniest of sin stocks i guess that's maybe my personal view is smith and wesson some people might have different opinions but that one will be interesting to look at it uh that is the

uh i guess if anyone doesn't know fire our brand um we will say i think people would probably a lot of people would probably agree that it's the sinniest yeah and we will say we're trying to look at the business models you can have your total personal opinion on these companies about whether you would have the morals to invest that we're separating that everyone can make their own choice for me i probably wouldn't buy smith and wesson i don't everyone has their own comfortability some people have defense contractors but like doesn't change the business so we're going to look at it and it should be an interesting one i'm honestly excited to look at this one because i've never looked at a firearms business don't know how profitable they

are and if i'm not mistaken they've had really good returns for shareholders in the years yeah and see that the reason it might be high is if hey you're like hey you know i don't care about that i could buy farms well yeah guys like myself people like myself that don't like it so that's probably where the opportunity is all right well that's a little tease for next week should be a fun one. Remember, we are not financial advisors. Anything we say on the show is not formal advice or recommendation. Ryan and I may have positions in securities discussed in this podcast. Thank you everyone for tuning in. We'll see you next time.