MGM (MGM) may be highly leveraged, but the company has given itself a nice cushion of liquidity to fall back on, and the stock has been overly punished in recent weeks, writes Morgan Stanley analyst Mark Strawn today in upgrading the shares to Overweight.
MGM has fallen 29% since July 28, versus 7% for the S&P 500. “[W]e see a more compelling risk/reward from current levels, though acknowledge the macro risks on a 9x levered company.”
The market appears overly concerned about MGM’s balance sheet, even as the company has bolstered its liquidity.
“We believe recent concerns about MGM�s liquidity, while valid given the macro uncertainty and MGM�s $13-billion debt load, are overdone. We believe MGM can maintain a $500-million liquidity cushion through 2013 even in a Bear-Case scenario,” Strawn writes.
MGM’s future is highly levered to a rebound on the Las Vegas Strip, which Strawn thinks is imminent. And the recent IPO of its Macau property takes some pressure off of its U.S. operations to drive all of the company’s growth.
“Las Vegas EBITDA is at trough levels, and we project a recovery to 65% of peak EBITDA by 2012, up from 45% currently, led by an acceleration in leisure demand.”
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