Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is MGM Resorts International (MGM, Financial). The stock, which is currently priced at 38.56, recorded a loss of 4.29% in a day and a 3-month decrease of 9.49%. The stock's fair valuation is $67.74, as indicated by its GF Value.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on three factors:
- 1. Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- 2. GuruFocus adjustment factor based on the company's past returns and growth.
- 3. Future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
Is MGM Resorts International a Value Trap?
However, investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with MGM Resorts International should not be ignored. These risks are primarily reflected through its low Altman Z-score of 0.81. These indicators suggest that MGM Resorts International, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Understanding the Altman Z-Score
Before delving into the details, let's understand what the Altman Z-score entails. Invented by New York University Professor Edward I. Altman in 1968, the Z-Score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
Company Snapshot: MGM Resorts International
MGM Resorts is the largest resort operator on the Las Vegas Strip with 35,000 guest rooms and suites, representing about one fourth of all units in the market. The company's Vegas properties include MGM Grand, Mandalay Bay, Park MGM, Luxor, New York-New York, and Bellagio. The Strip contributed approximately 74% of total EBITDAR in 2022. MGM also owns U.S. regional assets, which represented 31% of 2022 EBITDAR (MGM's Macao EBITDAR was negative in 2022). MGM's U.S. sports and iGaming operations are currently a high-single-digit percentage of its total revenue. The company also operates the 56%-owned MGM Macau casinos with a new property that opened on the Cotai Strip in early 2018. Further, we estimate MGM will open a resort in Japan in 2030.
Breaking Down MGM Resorts International's Low Altman Z-Score
A dissection of MGM Resorts International's Altman Z-score reveals MGM Resorts International's financial health may be weak, suggesting possible financial distress:
Conclusion: MGM Resorts International as a Value Trap
Despite its seemingly attractive valuation, the low Altman Z-score suggests that MGM Resorts International might be a potential value trap. The company's financial health appears to be weak, indicating a high likelihood of financial distress. This complexity underlines the importance of thorough due diligence in investment decision-making.
GuruFocus Premium members can find stocks with high Altman Z-Score using the following Screener: Walter Schloss Screen .
