Monday, July 19, 1999
MGM Grand shareholders yell, "Jackpot!"
HOW DID IT DOUBLE?
Jackpot! That is just one of the exclamations long-time shareholders of MGM Grand may have been yelling over the past several months. After bottoming below $23 in last autumn's mini-meltdown in the stock market, the shares in the casino operator have come roaring back to new all-time highs. The stock has now more than doubled, a fairly impressive feat in the comparatively stable world of casino stocks.
Despite fears that Las Vegas has become saturated with new casinos, MGM Grand has managed to post some fairly impressive growth in both its average room rate and total occupancy at its flagship property. Where in 1998's first half MGM had occupancy of 94.2% with an average rate of $99, this year's first half saw the company net an average of $104 per room with a healthy 98.3% occupancy. In the second quarter, the company's flagship property even had a stunning 100% occupancy. With the costs of running a hotel and casino relatively fixed, most of this increased revenue has dropped straight to the bottom line.
Another factor propelling the stock higher is the company's recent merger with Primadonna Resorts, a firm MGM had worked side-by-side with in building the New York New York casino in Las Vegas. While positive effects of the merger have yet to hit the bottom line, many are betting that the company's margins will improve thanks to the operating synergies and the reduced cost of Primadonna's debt capital.
Investors in MGM have also been getting quite excited about the company's opportunity in Detroit. After going through a grueling application process, MGM was selected to receive one of the three available licenses to build a large land-based casino in the heart of Detroit. While Detroit won't challenge Las Vegas or Atlantic City for vacation dollars any time soon, the local gaming market is potentially huge and largely untapped.
On June 11 MGM Grand added a few logs to the fire burning under the stock when it announced that it was offering to repurchase via self-tender offer another 6 million shares of the company's stock at $50 per share. This represented the second part of a buyback that saw the company purchase 6 million shares at $35 per share last August. While the stock has, strangely, yet to eclipse the $50 mark, the short-term performance of MGM's stock has nonetheless been quite good. Jackpot!
MGM Grand is one of the largest casino gaming companies in the country. Operating primarily in southern Nevada, MGM Grand owns the following casino resort complexes:
|City of Entertainment||Las Vegas||5,005|
|New York New York||Las Vegas||2,003|
|Primadonna Resorts||Primm, Nevada||2,679|
The largest casino in the world when its doors opened in 1993, the MGM Grand is on the southern portion of the famed Las Vegas strip. The property is in the final stages of a major renovation with the resort now being called "The City of Entertainment." Beyond a massive casino, the property also features over 5,000 hotel rooms and suites, dozens of restaurants and shops, a carnival-like midway, and a smallish theme park.
The highly successful New York New York opened across the street from The City of Entertainment in early 1997 in a joint venture with Primadonna Resorts. MGM Grand merged with Primadonna earlier this year, and the company now wholly owns New York New York as well as a handful of properties in Primm, a town along the Nevada-California border.
Plans are underway for the company to build one of only three land-based casinos allowed in Detroit. A temporary casino in Detroit should open later this month (pending licensing) with the much larger permanent facility opening about four years after that. Furthermore, the company owns a significant chunk of land along the Atlantic City boardwalk and has plans to build a major casino resort over the next few years. MGM Grand also owns or manages a handful of small casino properties in Australia and South Africa.
Trancinda Corp. and its reclusive billionaire owner Kirk Kerkorian hold roughly 61% of MGM Grand's common stock.
12-month sales: $979.1 million
12-month income: $71.8 million*
12-month EPS: $1.26*
Profit Margin: 7.3%
Market Cap: $3,019.4 million
Enterprise Value: $4,360.7 million
(*Includes one-time charges)
Cash: $107.4 million
Current Assets: $250.4 million
Total Assets: $2,672.9 million
Current Liabilities: $254.7 million
Long-Term Debt: $1034.1 million
Total Liabilities: $1,413 million
Shareholders' Equity: $1,259.9 million
HOW COULD YOU HAVE FOUND THIS DOUBLE?
It's been over a year now since news of MGM landing the Detroit license hit the wires, and there has been little doubt all along how lucrative a contract this could potentially be. With supply capped and a huge local population of gamblers to draw upon, it's a fairly safe bet that Detroit will be a roaring success for MGM. It's a bit confusing why investors didn't catch the full meaning of the news earlier.
Then there's the company's ongoing share repurchase. While MGM's share buyback may not be as bullish a "buy" signal as outright insider purchases of the common stock, the large size of the buyback can certainly be viewed as a signal that MGM's board of directors believes the shares to be undervalued. The first six million share buyback was certainly a bullish sign, just as the current proposed repurchase indicates the company's confidence in its operations.
Another bullish indication with MGM was the fact that the company has beaten its earnings estimates in each of the last two quarters. In the first quarter, Wall Street was expecting MGM Grand to report $0.34 in profits while the company brought home $0.42 in earnings, a full 23% ahead of the estimates. The strong results not only indicated that MGM's core business was fundamentally healthier than many were expecting, but it also meant that analysts would have to ratchet up their forward expectations. And since Wall Street looks forward, a rosier future portends good things for the stock.
WHERE TO FROM HERE?
When the books for 1999 are closed it will be interesting to look back at just how much MGM Grand changed. The company will have gone from operating one and a half domestic properties to wholly owning four large units. The company should be able to expand its margins in Nevada as the synergies of combining its operations with Primadonna continue to work their way through the system.
And there are the growth prospects in Detroit to consider. MGM looks to be the first land-based casino in the city, and the near-term results from the temporary casino will probably be mind-boggling. History has shown that companies that open casinos first in new markets can reap impressive returns while their peers are still constructing their units. Canadian casinos across the border from Detroit (which have 75% of their patrons coming from the U.S.) bring in roughly $500 million a year in gross revenue, which gives some indication of just how large a market there is in lower Michigan.
While the share buyback is a mildly bullish signal, it is interesting to note that much of the share repurchase will be funded with debt. In other words, the repurchase is more a capital refinancing move that will merely increase the company's leverage. While the move may increase the company's return on equity given the strong fundamental prospects, it does raise the risk to common equity holders.
Finally, there is the issue of valuation. The company is now expected to earn $1.71 per share in 1999 and $2.03 in 2000, but those numbers could very well be revised upwards given MGM's recent strength. Either way, that puts the stock at over 23-times forward profit estimates, but the cash flow (or EBITDA) should be significantly higher than the company's reported GAAP earnings. With Detroit up and running, the company looks to top $450 million in annual operating cash flow. While impressive, the current Enterprise Value is already over $4 billion, giving the company a forward EBITDA-to-Enterprise Value ratio somewhere near 10x, which is at the high end of where casino companies normally trade.
Either way, MGM Grand is a strong company that has bright prospects. It's no bargain at today's prices, but it is definitely worth keeping on the radar should the market throw the shares into the discount bin during its next panic attack.
-- Breakfast News: MGM Grand Bets on Itself (6/12/99)
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