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A little bit of financial engineering underway at MGM Resorts

A little bit of financial engineering underway at MGM Resorts

While many eyes have been focused the build up to today’s Apple (AAPL) event, Guilty Pleasure company MGM Resorts (MGM) has made some interesting moves. Recently the company adopted a $1 billion stock repurchase plan and announced it will sell the real estate of its National Harbor property to MGM Growth Properties (MGP), a real estate investment trust (REIT) that focuses on destination entertainment and leisure resorts. That property sale is estimated at $1.19 billion and should provide ample firepower for the new stock buyback plan at MGM Resorts.

Two quick observations – first, we see this piece of financial engineering as bringing added flexibility to MGM Resorts, while also adding some extra capital to the balance sheet. Second, generally speaking, we like stock buyback programs as they tend to increase our comfort level with a company hitting EPS expectations provided the company actually executes its stock repurchase plan. This morning MGM Resorts flexed its new buyback program by sharing it plans to buy 10 million shares from Tracinda, private investment corporation owned by the late Kirk Kerkorian and a significant owner of MGM shares. The transaction, which is expected to close later this week will shrink the outstanding share count by roughly 2%. Following the transaction, Tracinda’s position will be reduced to 8.3% of MGM’s outstanding shares and MGM will have roughly $627 million in buyback power remaining under this new authorization.

We see this as a solid start on executing this new buyback program. Should the company eventually complete this program at or near the current share price, it would shrink the outstanding share count by another 19 million shares or just over 3%.

We’d note this engineering falls below the company’s operating line, and as beneficial as they may be to the bottom line, as investors we still have to focus on the fundamentals. Our next set of monthly gaming revenue updates from Nevada as well as Macau will tell us how both the Mayweather vs. McGregor bout and Typhoon Hato helped or hindered things in August.

 

  • Ahead of those next updates, our price target on MGM Resorts remains $37, which offers just under 14% upside from current levels factoring in the current dividend yield of 1.3%.

 

Using an Expectations to Share Price Disconnect to Scale into Amplify Shares

Using an Expectations to Share Price Disconnect to Scale into Amplify Shares

 

  • We are using the recent drop in Amplify Snacks (BETR) shares to scale into the position on the Tematica Select List at current levels, which will also serve to improve our cost basis.

  • Despite revising our price target lower to $10.50 from $11, the sharp move lower in the shares offers more than 43% upside.

 

As we noted in this morning’s Monday Morning Kickoff, both volatility and investor angst rose following the North Korea inspired political drama last week. Over the weekend, a calmer tone emerged and that has the domestic stock market moving rebounding this morning. Candidly, this could turn out to be a dead count bounce, and we continue to have several concerns – second half earnings and GDP expectations, the debut of Trump’s tax reform plan, debt ceiling discussions, and the Fed unwinding its balance sheet. We expect those and any potential re-kindling of the North Korea tension will roil the markets over the coming weeks.

As a reminder, we don’t buy the market. We let our thematic lens be our investing guide as we look for companies that benefit from multi-year tailwinds. While we are prudent investors, we are also opportunistic ones, and that has us scaling into shares of Food with Integrity investment theme company Amplify Snacks (BETR) this morning. Last week, BETR shares fell more than 20 percent following the company’s June quarter earnings report, and that brings the cumulative pullback in the shares to more than 30 percent since recently peaking just under $11 on July 24.

 

So what happened last week that BETR shares fell some 20 percent?

While the company beat on revenue for the quarter and delivered as expected EPS, the company trimmed its outlook. While revenue will continue to benefit from the consumer shift to better-for-you food, Amplify is kicking up its marketing budget to build its brand as it introduces new products, primarily across its Skinny Pop line. While Tematica’s Chief Investment Officer, Chris Versace, is biased toward the original flavor, we know Tematica’s President Chris Broussard is simply jonesing for a cheese flavored variety. He will soon get his wish alongside several new flavors.

Owing to that incremental spend, which we view as a positive as it looks to build awareness of both new and existing products here in the US and abroad, EPS expectations have moved lower for both this year and next. 2017 earnings now sit at 0.38 per share, down from the prior 0.42, and 2018 expectations now sit at 0.48 per share, down from 0.55. In our view, those EPS revisions do not warrant the more than 30 percent correction in the shares over the last several weeks.

While we cannot ignore those EPS revisions, and we’re not as we are trimming our BETR price target back to $10.50 from $11, we will use the mismatch between opportunity, earnings reset and move in the shares to scale into the position on the Tematica Select List. With the shares trading below $7.50 this morning, our revised price target still offers 42% upside from current levels, and that has us keeping our Buy rating intact.

Before we leave you to make this addition, we suspect some may be wondering if our core thesis on the shares has changed, and the answer would be “no.” We also continue to see Amplify as a potential acquisition by PepsiCo (PEP), Snyder’s Lance (LNCE), Post Holdings (POST), General Mills (GIS) or other snack food company.