Option Trade 
MGM Resorts International (NYSE:MGM) Calls
Wednesday, February 15, 2017

** OPTION TRADE: Buy the MGM MARCH 17 2017 30.000 call at approximately $0.55. Place a pre-determined sell at $1.10.

Note: No protective stop losses added -- but if you wish to do so make it $0.25.

Also Note: This is a recommendation and individual members can use their own discretion as to when to enter or exit!

by Ian Harvey

MGM Resorts International (NYSE:MGM), is one of the world's leading global hospitality companies, operating a portfolio of destination resort brands including Bellagio, MGM Grand, Mandalay Bay and The Mirage, will release the Company's financial results for the fourth quarter and full year 2016 before the market opens tomorrow, Thursday, February 16, 2017. The consensus calls for earnings of $0.17 per share on revenue of $2.41 billion.

Last quarter, MGM Resorts posted a momentous 625.00% positive earnings surprise. In fact, the company posted positive earnings surprise in three of the last four quarters, with an average beat of 139.40%.

MGM has enjoyed nice gains over the last year, as conditions improve in both Las Vegas and Macau. The stock has been stuck in a sideways trend over the last three months, a result of the stock’s valuation. MGM has traded to a P/E of 54.7, which is high, but analysts do expect earnings growth of 19% during the year.

The street is very upbeat on the recent quarter, with a whisper number of 20 cents per share, versus the consensus 17 cents. One of the names in the sector has already reported, with Wynn Resorts (WYNN) topping estimates.

Equities research analysts at CLSA increased their FY2017 earnings per share (EPS) estimates for shares of MGM Resorts International in a research note issued to investors last Thursday. CLSA analyst J. Oh now anticipates that the firm will post earnings of $1.48 per share for the year, up from their prior estimate of $1.23.

The stock is down 3.0% since the start of the year.

MGM Resorts International has a 52 week low of $17.34 and a 52 week high of $30.62. The company’s 50-day moving average price is $28.97 and its 200 day moving average price is $26.91. The company has a market capitalization of $16.36 billion, a PE ratio of 54.66 and a beta of 1.66.

Influencing Factors to Consider                                    

MGM Resorts’ earnings in the to-be-reported quarter are expected to benefit from higher demand at its properties in Las Vegas on the back of improving employment rate trends and increasing tourism numbers in the region. With the Las Vegas Strip recording high occupancy rates, the company has been witnessing a solid rise in resort revenues, which should continue to boost the top line.

Moreover, the diversification of its resort portfolio and non-gaming options is likely to propel fourth-quarter revenues as well. Particularly, the opening of MGM National Harbor, a casino resort, on Dec 8, 2016, should drive revenues. Additionally, the company’s profit growth plan is also poised to increase the quarter’s profits.

MGM Resorts’ revenues, however, have been hurt by its sluggish performance in Macau over the past few quarters. Nevertheless, per the Macau Gaming Inspection and Coordination Bureau, gross gaming revenues (GGR) rose in all the three months of the quarter, thereby continuing the revival in Macau. We thus expect the company’s performance in the region to get a boost in the to-be-reported quarter.

Analysts Opinions

JPM analysts Joseph Greff, Daniel Politzer, Nicholas Leibold and Brandt Montour, who have an overweight rating on the stock, expect fourth quarter net revenue from the Las Vegas strip to rise 4% year on year and a 2% decline in Macau. But they expect adjusted earnings before interest, taxes, depreciation and amortization (Ebitda) to rise 13% overall, with a rise of 13% in Vegas and 11% in Macau, after royalties. They have a $39 price target on the stock, implying upside of 36%. Two excerpts from their earnings preview report:

    ” … We continue to believe that MGM possesses the best risk-reward in gaming, with ~65% of its cash flows coming from the Las Vegas Strip (and only ~10% exposure to Macau), a market with no new supply growth and group/convention momentum, which should allow it to garner continued attractive (and above U.S. lodging industry) overall room pricing and non-gaming, out of the room spend growth aided by incremental EBITDA coming from the T-Mobile Arena and Park related investments …

    Our 4Q Macau property level EBITDA estimate could be somewhat aggressive (J.P. Morgan estimate: $145 million versus consensus $133 million) given our interpretation of Wynn Resorts (WYNN) GGR [gross gaming revenue] share gains, but given that Macau is just 9% of MGM’s adjusted EBITDA and dependent on its one property in Macau, we think investor expectations seem set appropriately low …”

MGM Resorts International ‘s stock had its “overweight” rating reaffirmed by equities researchers at Morgan Stanley in a research report issued to clients and investors recently.

A number of other brokerages also recently weighed in on MGM…..

  •  Instinet reissued a “buy” rating and issued a $35.00 price objective on shares of MGM Resorts International in a research note on Tuesday, February 7th.
  • Telsey Advisory Group raised their price objective on MGM Resorts International from $33.00 to $34.00 and gave the company an “outperform” rating in a research note on Friday, December 9th.
  •  J P Morgan Chase & Co reissued an “overweight” rating and issued a $39.00 price objective on shares of MGM Resorts International in a research note on Friday.
  • Nomura restated a “buy” rating and issued a $34.00 price objective on shares of MGM Resorts International in a research report on Thursday, December 15th.
  • Goldman Sachs Group Inc. began coverage on shares of MGM Resorts International in a research report on Thursday, December 15th. They issued a “buy” rating and a $37.00 price objective for the company.
  • Aegis began coverage on shares of MGM Resorts International in a research report on Tuesday, December 20th. They issued a “buy” rating and a $35.00 price objective for the company.
  • Finally, Macquarie reissued an “outperform” rating and issued a $34.00 price objective on shares of MGM Resorts International in a research note on Thursday, November 10th.

One investment analyst has rated the stock with a hold rating and twenty-four have issued a buy rating to the company. The company presently has a consensus rating of “Buy” and an average price target of $32.37.

Harvey’s Options Volatility Indicator

Conclusion

Therefore, based on the facts above, and Harvey’s Options Volatility Indicator, the following option trade is recommended…..

 ** OPTION TRADE: Buy the MGM MARCH 17 2017 30.000 call at approximately $0.55. Place a pre-determined sell at $1.10.

Note: No protective stop losses added -- but if you wish to do so make it $0.25.

 

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Options traders win because they are successful.

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