When MGM Resorts launched Welcome to the Show, its first national TV ad campaign, the company might have been making an announcement that reflects more than its own evolution.
In styling itself a global entertainment company, MGM has claimed a role that can fairly be ascribed to several competitors.
No doubt, MGM has been a leader in growing beyond the casino floor. As the company stated in its Welcome to the Show announcement, it now operates 20 arenas and sells 8 million event tickets a year. It also operates millions of square feet of meeting and exhibit space, and offers scores of fine-dining restaurants. And, MGM has its non-gaming resort alliances internationally.
But what can be said for MGM can also be said for Las Vegas Sands, and in the case of convention and meeting business, in spades. Wynn, though more gaming centric, is the epitome of a luxury resort operator.
What MGM seems to be doing with Welcome to the Show is making a kind of official statement that the destination casino resort industry has completed its transformation into, as MGM says, a global entertainment industry.
The long-term implications for investors is that, after years of saying it should be so, casino operators could finally get the higher stock valuations their sister entertainment and lodging industries have long enjoyed.
The overall valuations of MGM, Wynn and Las Vegas Sands are skewed by the high valuations given to their Macau businesses. Factor them out, and valuations run more like eight to 11 times EBITDA.
One of the historic reasons cited for lower valuations among regional casino operators is legislative risk. Over the years, we’ve seen plenty of evidence that that risk is real: states raise gaming taxes when they need money, often to ridiculous levels, as we’ve seen in Delaware and Illinois. States legalize casinos, wreaking havoc in neighboring markets, a dynamic that casinos from Atlantic City to West Virginia to Indiana have had to endure.
Thus, regional casino operators have generally run around seven to eight times.
However, a lot of the risk has now been realized. There will be few, maybe no, major jurisdictions coming online. And casinos no longer are the easily stigmatized newcomers in state capitals, accepting abuse in exchange for the privilege of operating licenses. Today they are entrenched employers with legislative delegations defending their interests.
This doesn’t mean that casino investors can just glide along complacently. There is still plenty of risk. The Chinese and Macanese governments can still put the screws to casino operators, knocking down those valuations. State legislators will still seek the area of least resistance in raising tax revenues, and casinos will never benefit from public sympathy in those cases.
The destination resorts of Las Vegas are now cyclical, subject to reduced consumer spending come the next economic slow-down.
But it is true that the casino industry today is more like its sister industries than it was a few years ago. And that should bode well in the long-term for stock valuations.
