Las Vegas gamblers haven’t been able to play their cards since Nevada Governor Steve Sisolak closed casino doors for at least 30-days starting on March 18, 2020. Since, casino stocks have taken a beating like a drunk poker player betting his entire bankroll while needing a connecting card *on the river*.
MGM Resorts International (MGM) executives and directors are showing their cards with eight insiders purchasing more than 240,000 shares for a total investment that exceeds $27 million. 1 An experienced player would conclude they either have strong hands or are bluffing with bets like that on the table.
There hasn’t been buying to this degree of MGM insider buying in the past 20-years. The last transaction that’s somewhat similar is an institutional buy of $99 million in May 2009 at $7. That’s after MGM stock and the market bottomed out following the subprime crisis. It was also the last time that the number of inside buys outnumbered sales. One year later, shares of MGM Grand doubled by mid-May 2010.
Compared to some of the other major Casino’s in Las Vegas, MGM Grand has some pluses and minuses. First, on the negative side, the company’s return on equity (ROE) is the one of the lowest in the industry, which is probably why the company also trades at one of the lowest price to sales (P/S) ratios. They are also near the bottom of the pack for cash flow relative to sales.
On the plus side, MGM holds the least amount of debt to capital of the five biggest publicly traded casino/hotel/resort stocks. That means they should have more flexibility to borrow should they need to access the credit markets when their doors re-open for business. MGM also has the highest book value per share at $24.29. Currently, the stock trades at $15.04.
For the past five years, MGM has traded at an average of 1.5 times its book value. If MGM returned to its average price to book (P/B) ratio, shares would trade at $36.44 based on MGM’s end of 2019 book value. The lowest P/B value of 0.38 was achieved just a few weeks ago and its five-year high is 2.06, reached in January of 2018.
Casinos also appear to be included in the $2 Trillion The Coronavirus Aid, Relief, and Economic Security (CARES). Casinos and MGM could benefit greatly from the following according to the American Gaming Association: 2
- Carryback of Net Operating Losses: Allows companies to carry back losses from 2018, 2019, and 2020 to offset up to 100 percent of taxable income in the last five years, generating refunds for gaming businesses.
- Employee Retention Tax Credit: Gaming businesses closed by the government due to the coronavirus outbreak can claim a tax credit on employment taxes equal to 50 percent of wages, up to $10,000 of wages for each employee.
- Deferral of Social Security Taxes: Gaming employers may defer their share of Social Security tax payments on employee wages otherwise due for the remainder of 2020. This allows half to be paid by December 31, 2021 and the other half by the end of 2022.
- Increase on Business Interest Deduction: For 2019 and 2020 tax years, gaming businesses can deduct interest expense up to 50 percent of their adjusted taxable income (EBITDA: earnings before interest, taxes, depreciation, and amortization), up from 30 percent of such income previously.
- Qualified Improvement Property Fix: Gaming businesses will be able to immediately write off building improvement costs rather than depreciate these costs over 39 years.
- Refundable Credits for Prior Year Corporate Alternative Minimum Tax (AMT): Accelerates the ability for corporations to recover AMT credits, allowing a refund claim now to obtain additional cash flow.
It’s probably going to be a while before Las Vegas casinos are operating anywhere near their pre-corona capacity. However, it appears the worst of the coronacrash could be over. The CARES Act should help the industry and the lights could be turned back on sooner than later.
MGM insiders have surely made their $27 million bet and based on the MGM’s price to book history, shares of the casino stock could be considerably higher if/when life returns to the new normal, whatever that is. Add in the current divided yield of 4.31%, and investors looking to follow the lead of MGM insiders could benefit from a handsome total return in the next 12 to 24 months.
(*connecting card: for example, if the player has 6,7,9, and 10, a connecting card would be an 8 to make a straight 6,7,8,9,10 – river is the last card dealt in a game of poker.)
1 – https://www.secform4.com/insider-trading/789570.htm
2 – https://www.americangaming.org/wp-content/uploads/2020/03/AGA_CV19_CARES-Act-Factsheet-3-26.pdf