Value-focused investors constantly seek stocks priced below their intrinsic value. One such stock that demands attention is MGM Resorts International (MGM, Financial). The stock, currently priced at $43.31, recorded a daily gain of 1.79% and a 3-month increase of 0.88%. The stock's fair valuation, as indicated by its GF Value, is $66.72.
Understanding the GF Value
The GF Value represents a stock's current intrinsic value, derived from our exclusive method. The GF Value Line provides an overview of the fair value at which the stock should trade. It is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio, and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of business performance.
The GF Value Line represents the fair value at which the stock should trade. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Unveiling the Risk Factors
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 0.82. 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, it's crucial to 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 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 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.
MGM's Low Altman Z-Score: A Breakdown of Key Drivers
A dissection of MGM Resorts International's Altman Z-score reveals that the company's financial health may be weak, suggesting possible financial distress.
Conclusion
Despite its seemingly attractive valuation, MGM Resorts International may be a potential value trap due to its low Altman Z-Score and other risk factors. This underlines the importance of thorough due diligence in investment decision-making. GuruFocus Premium members can find stocks with high Altman Z-Score using the Walter Schloss Screen.
