Earnings

Comparing MGM Resorts International (MGM) and Norwegian Cruise Line Holdings Ltd. (NCLH)

MGM Resorts International (NYSE:MGM) and Norwegian Cruise Line Holdings Ltd. (NASDAQ:NCLH) are the two most active stocks in the Resorts & Casinos industry based on today’s trading volumes. Investors are clearly interested in the two names, but is one a better choice than the other? We will compare the two companies across growth, profitability, risk, valuation, and insider trends to answer this question.

Growth

Companies that can consistently grow earnings at a high compound rate usually have the greatest potential to create value for shareholders in the long-run. Analysts expect MGM to grow earnings at a 7.90% annual rate over the next 5 years. Comparatively, NCLH is expected to grow at a 12.75% annual rate. All else equal, NCLH’s higher growth rate would imply a greater potential for capital appreciation.

Profitability and Returns



A high growth rate isn’t necessarily valuable to investors. In fact, companies that overinvest in low return projects just to achieve a high growth rate can actually destroy shareholder value. Profitability and returns are a measure of the quality of a company’s business and its growth opportunities. We’ll use EBITDA margin and Return on Investment (ROI) to measure this. MGM Resorts International (MGM) has an EBITDA margin of 28.14%, compared to an EBITDA margin of 27.54% for Norwegian Cruise Line Holdings Ltd. (NCLH). This suggests that MGM underlying business is more profitable. MGM’s ROI is 10.70% while NCLH has a ROI of 8.40%. The interpretation is that MGM’s business generates a higher return on investment than NCLH’s.

Cash Flow 

Earnings don’t always accurately reflect the amount of cash that a company brings in. MGM’s free cash flow (“FCF”) per share for the trailing twelve months was +0.61. Comparatively, NCLH’s free cash flow per share was -2.02. On a percent-of-sales basis, MGM’s free cash flow was 3.71% while NCLH converted -9.46% of its revenues into cash flow. This means that, for a given level of sales, MGM is able to generate more free cash flow for investors.




Liquidity and Financial Risk

Balance sheet risk is one of the biggest factors to consider before investing. MGM has a current ratio of 0.90 compared to 0.20 for NCLH. This means that MGM can more easily cover its most immediate liabilities over the next twelve months. MGM’s debt-to-equity ratio is 2.03 versus a D/E of 1.34 for NCLH. MGM is therefore the more solvent of the two companies, and has lower financial risk.

Valuation

MGM trades at a forward P/E of 19.20, a P/B of 2.73, and a P/S of 1.71, compared to a forward P/E of 12.57, a P/B of 2.67, and a P/S of 2.59 for NCLH. MGM is the cheaper of the two stocks on sales basis but is expensive in terms of P/E and P/B ratio. Given that earnings are what matter most to investors, analysts tend to place a greater weight on the P/E.

Analyst Price Targets and Opinions

Just because a stock is cheaper doesn’t mean there’s more value to be had. In order to assess value we need to compare the current price to where it’s likely to trade in the future. MGM is currently priced at a -18.23% to its one-year price target of $37.79. Comparatively, NCLH is -9.75% relative to its price target of $64.72. This suggests that MGM is the better investment over the next year.

The average investment recommendation on a scale of 1 to 5 (1 being a strong buy, 3 a hold, and 5 a sell) is 1.90 for MGM and 2.00 for NCLH, which implies that analysts are more bullish on the outlook for NCLH.

Risk and Volatility

No discussion on value is complete without taking into account risk. Analysts use a stock’s beta, which measures the volatility of a stock compared to the overall market, to measure systematic risk. A stock with a beta above 1 is more volatile than the market. Conversely, a beta below 1 implies a below average level of risk. MGM has a beta of 1.47 and NCLH’s beta is 1.13. NCLH’s shares are therefore the less volatile of the two stocks.

Insider Activity and Investor Sentiment

Short interest, or the percentage of a stock’s tradable shares currently being shorted, is another metric investors use to get a pulse on sentiment. MGM has a short ratio of 2.18 compared to a short interest of 2.38 for NCLH. This implies that the market is currently less bearish on the outlook for MGM.

Summary

MGM Resorts International (NYSE:MGM) beats Norwegian Cruise Line Holdings Ltd. (NASDAQ:NCLH) on a total of 9 of the 14 factors compared between the two stocks. MGM is more profitable, generates a higher return on investment, has higher cash flow per share, has a higher cash conversion rate and higher liquidity.  MGM is more undervalued relative to its price target. Finally, MGM has better sentiment signals based on short interest.

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