“MGM has gone through a transformation, recently announcing four transactions, and we believe the market is not giving full credit. Pro forma, we see three drivers of upside: (1) a cleaner more simplified organization with a more attractive capital structure, (2) upside to numbers (our ’23 consolidated EBITDAR [earnings before interest, taxes, depreciation and rent costs] is ~$4.4 billion vs street $3.4 billion), and (3) improving sentiment,” Chaikin said.
Shares of MGM popped 7.2% to $47.60 on the upgrade.
Chaikin isn’t necessarily super bullish on the recovery of the casino sector from the pandemic as the prime reason for MGM’s stock being potentially undervalued at current levels. Rather, the analyst thinks MGM has made a few savvy moves that will help it reduce debt and bolster its long-term earnings power.
The stock is up 51% year-to-date, outperforming the S&P 500’s 16% gain. Rivals Wynn and Las Vegas Sands have seen their stock prices crash 19% and 33%, respectively, on the year.
The analyst hiked his rating on the casino operator to out-perform from neutral on Tuesday, citing the market overlooking several key upside catalysts.
Chaikin sees fair value on MGM to $68 a share over the next 12 months, up from $33 previously.
Explains Chaikin, “Since May 2021, MGM has entered into four major transactions: (1) sold its 42% position in MGP for $4.4 billion (a major deleveraging event), (2) purchased their remaining 50% position and consolidated the operations of City Center (a joint venture previously that was not getting full value), (3) conducted a sale lease back of their property in Springfield (deleveraging event), and (4) purchased the operations of the Cosmopolitan in Las Vegas (portfolio improvement). In short, pro forma consolidated debt will go from ~$12.7 billion in 2Q21 to ~$8.5 billion pro forma, and cash will go from ~$5.6 billion in 2Q21 to ~$9 billion pro forma.”
Brian Sozzi is an editor-at-large and anchor at Yahoo Finance. Follow Sozzi on Twitter @BrianSozzi and on LinkedIn. Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, YouTube, and reddit