Why MGM Resorts (MGM) Is Down Today

NEW YORK (TheStreet) -- MGM Resorts  (MGM) was falling 2.14% to $25.80 on Wednesday after J.P. Morgan downgraded MGM China, which MGM controls, to Neutral.

J.P. Morgan started to turn around on Macau casinos in its report, saying that the stocks appear to be fairly valued at this point. According to Barron's, the sector has posted an average gain of 137% since the start of 2013.

"Valuations have yet to hit 'bubbly' levels in our view (21x FY14E P/E, against 20% earnings growth), but multiples have expanded significantly, and the sector has also just seen a wave of Streets upgrades, (notably) more analysts are starting to factor in more aggressive growth assumptions and using DCF to justify valuations," the J.P. Morgan report reads. "After adjusting price targets to take into account the new casino projects and FY14/15E estimates, we recommend that investors trim positions."

TheStreet Ratings team rates MGM RESORTS INTERNATIONAL as a Hold with a ratings score of C. TheStreet Ratings Team has this to say about their recommendation:

"We rate MGM RESORTS INTERNATIONAL (MGM) a HOLD. The primary factors that have impacted our rating are mixed - some indicating strength, some showing weaknesses, with little evidence to justify the expectation of either a positive or negative performance for this stock relative to most other stocks. The company's strengths can be seen in multiple areas, such as its revenue growth, solid stock price performance and increase in net income. However, as a counter to these strengths, we also find weaknesses including generally higher debt management risk, disappointing return on equity and weak operating cash flow."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • MGM's revenue growth has slightly outpaced the industry average of 0.5%. Since the same quarter one year prior, revenues slightly increased by 9.2%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Powered by its strong earnings growth of 81.08% and other important driving factors, this stock has surged by 98.61% over the past year, outperforming the rise in the S&P 500 Index during the same period. Regarding the stock's future course, our hold rating indicates that we do not recommend additional investment in this stock despite its gains in the past year.
  • MGM RESORTS INTERNATIONAL reported significant earnings per share improvement in the most recent quarter compared to the same quarter a year ago. This company has reported somewhat volatile earnings recently. But, we feel it is poised for EPS growth in the coming year. During the past fiscal year, MGM RESORTS INTERNATIONAL swung to a loss, reporting -$3.61 versus $5.56 in the prior year. This year, the market expects an improvement in earnings (-$0.25 versus -$3.61).
  • Return on equity has greatly decreased when compared to its ROE from the same quarter one year prior. This is a signal of major weakness within the corporation. Compared to other companies in the Hotels, Restaurants & Leisure industry and the overall market, MGM RESORTS INTERNATIONAL's return on equity significantly trails that of both the industry average and the S&P 500.
  • Net operating cash flow has declined marginally to $365.70 million or 2.48% when compared to the same quarter last year. In conjunction, when comparing current results to the industry average, MGM RESORTS INTERNATIONAL has marginally lower results.

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