MGM rides the Las Vegas recovery

Shares are down after the company's disappointing quarterly earnings, but this might just be the time to buy.

By Jim J. Jubak May 4, 2012 2:22PM
Image: Las Vegas (© Dennis Flaherty /Photolibrary/Photolibrary)MGM Resorts International (MGM) reported a loss Thursday of 44 cents a share for the first quarter. That was much wider than the loss of 15 cents a share projected by Wall Street analysts. 

So it's not especially surprising that the stock fell 4.65% Thursday. MGM shares were down another 3.6% Friday on the general decline in U.S. stocks after disappointing April jobs numbers.

On March 20, I wrote a post arguing that you should put MGM Resorts on your watch list with a buying target of $13.30 or lower. (That post has more details on the company's improving debt position.) Well, Friday the shares were trading at $12.43. That's sure below $13.30, so as of May 4 I'm buying MGM Resorts International for my Jubak's Picks portfolio.

Why buy a stock after it misses quarterly earnings estimates? Because the wider-than-expected loss was a result of one-time charges, and the underlying recovery in Las Vegas that is the reason to own this stock continues on track.

Of that 44 cents a share loss, 35 cents came from things like a loss on retirement of long-term debt (8 cents a share) and provision for income taxes (26 cents a share versus a benefit in the first quarter of 2011.)

That's real money, of course, but you're buying MGM Resorts, if you're buying it at all, because the company's Las Vegas properties are rebounding along with Las Vegas as a whole. And that trend was still clearly visible in this quarter's results. Revenue for the company as a whole -- which includes MGM China -- climbed 51%. Excluding MGM China net revenue increased by 5% from the first quarter of 2011. Total revenue grew to $2.29 billion versus the $2.26 billion projected by the analyst consensus on Wall Street.

The following video has more about gaming stock picks.

Post continues below.
The all-important RevPAR number (revenue per available room) on the Las Vegas strip grew by 4% from the first quarter of 2011 -- that's important growth when you own 10 casino hotels in Las Vegas and you're the largest company operating in that market.

For the second quarter and for all of 2012, the company told investors to expect RevPAR in the mid-single digits with some possible upside. In the first quarter the company delivered exactly that upside to its guidance with 4% Las Vegas Strip RevPAR versus its guidance of 2% to 3%. The Las Vegas convention calendar looks solid, the company said in its conference call, with a strong event calendar.

Investors might have also been disappointed with the company’s lagging position in Macau's hot Cotai Strip area, especially in comparison to Wynn Resorts (WYNN). That company announced that it had received final approval on Tuesday for its new Cotai Strip development. MGM could only say that a draft land concession -- no final approval -- for its Cotai Strip property is imminent.

I'd put a $16 12-month target price (May 2013) on MGM Resorts shares. That target calculation includes a premium to shares of smaller casino/hotel operators but represents a discount to Macau leaders such as Wynn Resorts and Las Vegas Sands (LVS).

At the time of this writing, Jim Jubak didn't own shares of any companies mentioned in this post in personal portfolios. The mutual fund he manages, Jubak Global Equity Fund (JUBAX), may or may not own positions in any stock mentioned. The fund did own shares of Sands China as of the end of December. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund's portfolio here. 
8Comments
May 4, 2012 7:07PM
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though I must admit i haven't been there in a year and a half- Vegas is still my favorite destination anywhere in this country- you can have a ball there and never gamble- there really is no where else like it
May 4, 2012 3:33PM
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I was just in Las Vegas this past week and even though there were two major conventions going on the strip was not really that busy.  I went into the Wynn and there was hardly anyone in the shops etc.  I think the low end hotel segment is probably doing OK attracting those who can drive in but in speaking with casino workers and cab drivers who actually could speak English...they said overall the economy is still flat.  Part of the problem is that Las Vegas is no longer a deal as they gouge you for food and drink.  Plus many states are opening up casinos so you no longer need to fly out there to get your gambling fix.  I also feel the strip is dirty etc. and there are much better options for people who want to gamble and have a nice vacation.
May 5, 2012 8:49PM
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This guy has to be high, MGM is absolutely buried in a mountain of debt that they will never in a million years pay off unless they can find some more suckers in the middle east they can con.

Vegas has more like 25% unemployment and it's a dead one horse town that will never be back.

We are still number one though!!! that is in high school and drop outs and pregnancies, crack heads and whores.  Crime is rampant and cops are shooting anyone that sneezes. God Bless America!!!

May 6, 2012 2:53PM
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I've been going to Vegas for 28 years.  That said I have never seen it this bad.  Morale is low, unemployment high, talk to any cabbie and he'll tell you how bad it is.  Ask any dealer.

 

Vegas used to be a fun place for a vacation, still is.  Now, Nevada could have helped itself out, but they re-elected Reid.  They have no one to blame but themselves.  Maybe Reid needs to keep the GSA out of Vegas.  He needs for Obama to keep his big trap shut.  He probably cost 200,000 jobs there with his avoid Vegas speeches.

 

That said, MGM is takking better  care of it's properties than Harrahs.  I'll be back in Vegas because there is  no gambling experience like it.!

May 8, 2012 4:32PM
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"He probably cost 200,000 jobs there with his avoid Vegas speeches."
Highly doubtful.  More likely the housing bubble.  Thanks for the expert analysis though. 
May 5, 2012 12:36PM
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I haven't been to Vegas since my birthday in 2004 . I still have the itch to try out my luck there once I have some capital available . By the way , which casino resorts offer the best deal in Vegas nowadays ?
May 4, 2012 10:10PM
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the buffering on these vid's is relentless. could scripting me a solution.I'm talking @50 sec on avg. I seldom wait for the conclusion.
May 4, 2012 8:39PM
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Recovery???  I live in Vegas.  13% unemployment rate.  1000's of illegal's looking for the same job for half the pay.  Our schools, health care, foreclosure rates, and crime rates still rank among the worst in the nation.  Our roads suck.  That being said, any investment in a utility that preys on human weakness and vice is most likely a profitable one.    
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