Deutsche Bank Doesn't Like MGM's Odds

After an impressive 32-percent gain in the past year, MGM Resorts International MGM’s lucky streak may be coming to an end. On Monday, Deutsche Bank downgraded MGM shares from Buy to Hold, and analyst Carlo Santarelli said he expects MGM stock to be range-bound for the time being.

According to Santarelli, the current Las Vegas Strip market cycle is showing signs of maturation, and many of the potential bullish catalysts for the company are already reflected in the current share price.

“While MGM has clear positives, including a strengthening FCF profile, further potential asset monetization catalysts, and a new Cotai opening, we believe LV Strip fundamentals are exhibiting late cycle tendencies and we anticipate a continued slowing of Strip EBITDA growth, which we believe will likely pressure trading multiples,” Santarelli wrote (see his track record here).

Santarelli listed four challenged MGM faces in Las Vegas in coming years:

1. MGNs occupancy in Las Vegas has been flat or down in four out of the last five quarters.
2. MGM faces difficult 2018 comps as it laps its 2017 implementation of high-margin parking fees.
3. Stagnant gaming volumes will become more of an issue.
4. Domestic group business “appears mixed at best.”

Despite the downgrade, Santarelli acknowledged there are plenty of things for MGM investors to like about the stock. MGM has the potential to make additional strategic asset transactions with MGM Growth Properties LLC MGP, and it is opening up a new Macau megaresort on the Cotai Strip before the end of the year.

While risk/reward is balanced at the stock’s current price, Santarelli says MGM remains a favorable play compared to most other consumer discretionary stocks.

Deutsche Bank maintains a $36 price target for MGM.

Related Link: Vegas Strip Revenue Slumps In July