Options Trade of the Week
MGM Resorts International (NYSE:MGM) Puts
Tuesday, February 17, 2015

**OPTIONS TRADE OF THE WEEK: Buy the MGM Apr 2015 20.000 put (MGM150417P00020000) at or under $0.55, good for the day. Do not place a protective stop limit but a pre-determined sell at $0.90.


by Ian Harvey

February 17, 2015


**Macau Restrictions Along With Other Factors Impacting MGM!**

MGM Resorts International (NYSE: MGM), a hospitality holding company, where the primary business is the ownership and operation of casino resorts, which includes offering gaming, hotel, convention, dining, entertainment, retail and other resort amenities, will report earnings this morning, with analysts expecting the company to announce earnings of $0.06 per share and revenue of $2.41 billion for the quarter.

The Chinese government's crackdown on corruption, increased high-roller scrutiny and a partial smoking ban has caused a major problem for gambling in Macau, which has resulted in gaming revenue falling for the eighth consecutive month up until January, down 17.4% year over year. February is expected to be much worse -- with analysts anticipating a 35% to 42% decline over 2014 levels.

Combine this with U.S.-based casino operators also seeing lower gaming revenue from Sin City. After four years of annual gains, gambling revenue on the Las Vegas Strip fell 2.1% in 2014, according to the Gaming Control Board.

And MGM Resorts International is at the forefront of this situation having lofty valuations, high debt levels and poor technicals, which should see a sell-off after the earnings report.

Technical Oulook

MGM Resorts International has a 52 week low of $17.25 and a 52 week high of $28.75. The stock’s 50-day moving average is $20.36 and its 200-day moving average is $22.31. The company has a market cap of $10.608 billion and a price-to-earnings ratio of 70.10.

Shares of MGM are down 24% from their July high compared with a 5% gain for the S&P 500. MGM has also failed to surpass a single previous month's high since July, spawning a bearish channel. The upper boundary of that channel, along with the 50-day moving average, should act as resistance.

A bearish wedge is also forming, which forecasts a big, downward move on a breakdown.

Factors Contributing to MGM’s Continuing Downwards Spiral!

1. Revenues are being effected due to a sluggish environment in Macau as high stake gamblers curtail spending amid a cooling Chinese economy. It is also the result of a nationwide crackdown on corruption in China that compelled Macau officials to impose restrictions on VIP gamblers to stop billions of dollars from being siphoned off illegally from mainland China to Macau.

MGM Resorts derives a solid share of its revenues from Macau, the largest gaming destination in the world. Gross gaming revenues in the Macau region have been declining since Jun 2014. In fact, Macau gaming revenues plunged double digits in all three months of the fourth quarter of 2014 due to the anti-graft corruption drive undertaken by the Chinese government.

Over the last 30 days, estimates for the fourth quarter and 2014 have largely declined.

2. Meanwhile, tighter restrictions on visas, the smoking ban in the casinos and protests in Hong Kong are posing considerable threats to Macau gaming revenues, raising concerns for companies operating in the region. These factors have been keeping gamblers, primarily VIP gamblers, away.

3. A worrying trend has been set by competitors of MGM, with previous reports -- such as that experienced by Las Vegas Sand Corp.

4. The Nevada Gaming Control Board released its December and full year numbers recently, where the commission said that casinos statewide generated $11 billion in revenue during the year, a 1.1% decline from the $11.1 billion haul from 2013.

Gaming revenue from the Las Vegas Strip was down 2.1% to $6.37 billion, ending four consecutive years of increases, with gaming revenue in the month of December falling 8% from the previous year to $950.7 million and 16.4% on the Strip to $555.2 million.

5. MGM has underperformed the S&P 500 Index, declining 12.16% from its price level of one year ago, and looking ahead, other than the push or pull of the broad market, there does not appear to be anything in the company's numbers that may help reverse the decline experienced over the past 12 months.

6. Hotel revenue in Vegas might be diverted as the Malaysian company Genting, owner of Resorts World casinos in New York and around the world, is getting ready to start construction on a $4 billion project on the Vegas Strip called Resorts World Las Vegas. This massive project planned for completion in 2016/2017 will include three hotel towers, along with a massive gaming floor and a replica of the Great Wall of China. Analysts predict that the massive increase in hotel room supply will drive down RevPAR at nearby resorts. Since MGM has been using RevPAR to support its Vegas comeback story, this could be a reason the stock sees a sell-off as Genting's behemoth resort is finished.

Analysts Opinions

Revenue per available room or RevPAR could prove to be a key factor in deciding which way the company will report its results. Deutsche Bank analyst, Carlo Santarelli, said that the company will come out with a robust RevPAR in the fourth quarter that will most likely be in tune with the company’s forecast of 5% growth in the fourth quarter. The brokerage does not believe less than this.

Analyst Santarelli said that over half of the shortfall in the Strip gross gaming revenue drop of 9.2% was related to MGM’s competitors. Additionally, the year-over-year shortfall happened due to the weak margin table in the game division. The analyst felt that the company is able to get a 15.5% premium to LVCVA Strip Hotel RevPAR. The brokerage has a rating of ‘Buy’ with a price objective of $29.

It appears that most analysts have a more positive attitude towards MGM than many investors when observing the research reports available.

However, TheStreet Ratings team rated MGM as a Hold with a ratings score of C. TheStreet Ratings Team had this to say about their recommendation:

"We rate 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, impressive record of earnings per share growth and expanding profit margins. However, as a counter to these strengths, we also find weaknesses including a generally disappointing performance in the stock itself, generally higher debt management risk and weak operating cash flow."

Also, MGM has been given a “B-” credit rating by analysts at Morningstar. The research firm’s “B-” rating suggests that the company is a high default risk. They also gave their stock a three star rating.

A number of other research reports are as follows:-

• Analysts at Deutsche Bank set a $29.00 price target on shares of MGM Resorts International and gave the company a “buy” rating in a research note on Wednesday, February 4th.

• Analysts at Janney Montgomery Scott set a $24.00 price target on shares of MGM Resorts International and gave the company a “buy” rating in a research note on Monday, January 26th.

• Analysts at Barclays lowered their price target on shares of MGM Resorts International from $27.00 to $24.00 and set an “overweight” rating on the stock in a research note on Friday, January 23rd.

• Finally, analysts at Union Gaming Research initiated coverage on shares of MGM Resorts International in a research note on Thursday, January 22nd. They set a “buy” rating on the stock.

Three analysts have rated the stock with a hold rating and seventeen have assigned a buy rating to the stock. The company presently has an average rating of “Buy” and an average target price of $29.64.


Along with the downward driving forces already mentioned the next catalyst for MGM's leg lower will be the company's upcoming earnings release. While MGM may meet analysts' estimates, it is believed that the guidance will be lackluster and investors will sell.

Therefore, based on the facts above the following options trade is recommended…..

**OPTIONS TRADE OF THE WEEK: Buy the MGM Apr 2015 20.000 put (MGM150417P00020000) at or under $0.55, good for the day. Do not place a protective stop limit but a pre-determined sell at $0.90.

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