Morgan Stanley Sees MGM's Profit Growth Plan Driving An Inflection Point In Stock

• MGM Resorts International MGM shares have lost 4 percent in six months, even after hitting a high of $22.64 on August 17.
• Morgan Stanley’s Thomas Allen maintained an Overweight rating on the company, with a price target of $26.
• Allen expects the company’s profit growth plan to drive stock inflection.

MGM is scheduled to report its 3Q15 earnings on October 29. The company is to provide details on the progress of its $300 million Profit Growth Plan [PGP]. “We believe the market has yet to reflect the upside from MGM's PGP,” analyst Thomas Allen wrote.

Allen named MGM as the top pick in US Gaming, in view of:

1. The company’s ability to capitalize on its profit growth opportunity
2. Management’s commitment to evaluate strategic options – these include “an OpCo / PropCo split, asset sales, or even a VMware-style tracker stock (could benefit MGM by creating a Vegas pure play and helping it de-lever)”
3. Expectation of strong Vegas trends

An analysis of profit growth initiatives taken by other companies suggests that investors support programs that boost profit growth. The analyst added, however, that MGM’s shares have not “meaningfully re-rated since the announcement.”

In the report Morgan Stanley noted, “There has been a clear pattern of stock outperformance in cases where announced plans drove a visible acceleration in profit growth, while companies that have not been able to translate the plans into growth have seen their stocks punished.”

Allen expressed optimism regarding MGM being able to realize its PGP, and expects its US EBITDA growth to accelerate from 5 percent per annum to 14 percent. The optimism is backed by:

1. Several areas of low hanging fruit, like standardizing employee dining options, linens, etc.
2. Management’s cost saving target of $200m implying merely a 4 percent reduction in MGM's US cost base, which is at the low end of precedents' range of 4-15 percent.
3. MGM's cost management lagging its Vegas peers.