MGM Resorts (MGM) Rises on Analyst Upgrade; Risk/Reward is 'Favorable'

September 20, 2011 4:36 PM EDT
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Price: $28.74 --0%

Rating Summary:
    29 Buy, 3 Hold, 0 Sell

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    Up: 18 | Down: 13 | New: 9
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Shares of MGM Resorts (NYSE: MGM) rose modestly Tuesday as the company picked up another bull.

Morgan Stanley lifted its rating on the casino operator from Equal Weigh to Overweight with a $15 price target, suggesting 38% upside.

"We expect improving leisure trends in Las Vegas that have lagged other consumer sectors' recoveries and high incremental EBITDA flow-through to drive EBITDA momentum. MGM's ability to dividend cash from Macau should mitigate recent B/S concern", analyst Mark Strawn stated.

Following the recent sell-off, MGM's risk/reward is more favorable, the analyst argues. With Macau top line trends remaining strong, downside is limited to $8-$9 per share.

The firm also said they believe 8-10% growth in room rates (+5% leisure) should be achievable through 4Q11, despite macro concerns.

Morgan Stanley forecasts 15% EBITDA CAGR in LV through 2013 on 5% topline growth. Their base case of 2012 LV EBITDA estimate of $1.25 bn assumes 6% RevPAR growth and 5% growth in spend-per-occupied-room, generally below the mid-2000s up-cycle.

Concerns about MGM's liquidity are "overdone," according to the firm. "We believe MGM can maintain a $500-mn liquidity cushion through 2013 even in a Bear-Case scenario."

Shares of MGM closed up 1.4% to $11.03 on Tuesday.

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