MGM's Solid Q3 Puts It One Step Closer To Becoming An 'Investment-Grade' Stock

The better-than-expected third-quarter results put MGM Resorts International MGM one step closer to become an “investment-grade” stock.

CLSA expectsMGM to turn free cash flow positive in 2017, driven by the upcoming openings of National Harbor and MGM Cotai.

Rating Boost Ahead?

“Given management's positive outlook for Vegas in 2017 (with good visibility owing to high convention mix), and the earnings uplift from the upcoming openings of National Harbor and MGM Cotai, we believe MGM will turn FCFE positive in 2017 and move one step closer to the milestone of an investment-grade rating,” analyst Jon Oh wrote in a note.

Investment grade refers to the quality of a company's credit, and an investment grade rating enhances the probability of repayment of a debt issued by a company.

Investopedia says a company must be rated at 'BBB' or higher by Standard and Poor's or Moody's in order to gain an investment grade rating. Anything below this 'BBB' rating is considered non-investment grade, and if the rating is 'BB' or lower, it is known as junk grade.

Analyst's Take

Meanwhile, the company said its Las Vegas Strip RevPAR rose 11 percent in the quarter, helped by a strong convention mix that allowed the company to drive rate. Management guided to 3 percent RevPAR growth in the fourth quarter against a tough 12 percent comparison.

In addition, Oh raised his 2017 Las Vegas Ebitda forecast to $1.81 billion from $1.72 billion, and overall adjusted Ebitda by 5 percent to $2.97 billion in 2017 on positive momentum in the business and results from the Profit Growth Plan.

The analyst also increased his target price to $30 from $29.

“[B]ut with the stock up +20 percent YTD and +64 percent off February lows, we believe the shares are fairly valued and maintain our O-PF rating,” Oh continued.

At time of writing, shares of MGM Resorts rose 3.9 percent to $28.24. On November 7, the stock hit a 52-week high of $28.30.