Mandalay on Fire

Q: What's hotter than Mandalay Bay?
A: Nothing.

Premium hotel and casino operator Mandalay Resort Group (NYSE: MBG  ) continues to roll, with its flagship Mandalay Bay driving the bus. Operating cash flow in the first quarter climbed 36.1% to $234.7 million, helping profits jump to a record $1.30 per share -- well ahead of its April forecast of $1.10.

Anchoring the south end of the Las Vegas Strip, Mandalay Bay generated $77.4 million in operating cash flow, 67% more than last year. Helping boost results was the addition of a second hotel tower (THEhotel) and an upscale retail shopping space (Mandalay Place) that connected Mandalay Bay to Luxor in late 2003. RevPAR (revenue per available room, a standard measure of resort profitability) at Mandalay Bay rose 16%, with occupancy at THEhotel's 1,117 suites clocking in at 86% at an astounding average room rate of $239.

I'll admit it: I did my part, spending Final Four weekend at Mandalay Bay in the name of research. But I had little to do with slot revenues at the property climbing 30% -- that can be attributed to the extra casino traffic generated by the hotel.

And the growing, flourishing Mandalay Bay property has made the company's other Strip properties more valuable. Operating cash flow at Luxor next door was up 30.2% to $42.3 million, with RevPAR up 24% and the average room rate hitting a record $120 for the quarter. Excalibur saw similar results. Further up the Strip, Monte Carlo -- 50% owned by MGM Mirage (NYSE: MGG  ) -- also reported a 33% increase in operating cash flow and a 24% pop in RevPAR.

Overall, cash flow at the Strip properties grew 43%, with Circus Circus being the only property not to report record results.

And Mandalay didn't do too shabby elsewhere, either. The Nevada casinos outside of Las Vegas bucked a trend by growing combined operating cash flow, despite increasing competition from Indian gaming in California. Likewise, the Gold Strike in Tunica, Miss., and the 50%-owned MotorCity casino in Detroit both experienced healthy improvement in operating cash flow.

The only real blemish was the 50%-owned Grand Victoria in the Chicagoland market, where results were weighed down by last summer's tax hike, which likewise hurt Harrah's Entertainment (NYSE: HET  ) , Argosy Gaming (NYSE: AGY  ) , and Penn National (Nasdaq: PENN  ) . But even that won't last forever.

In all, there isn't much bad to say about Mandalay. You might look past the persistent insider selling, which beyond the top two executives seems to be tied to the rising stock price. But if you do, you should be mindful of the pace of employee options-related growth in the share count. Average diluted shares would have climbed 9.5% over the past year, if not for the company's 3.3 million-share purchase -- which carries a cost -- related to an equity forward agreement.

Given the company's fantastic performance and outstanding cash-flow growth, the valuation is less alarming, and the stock may even be a passable buy for a premium company. If you'd rather hold off for now, take solace in the fact that so long as the shares keep climbing, stock will always be for sale.

Going to Las Vegas? Visit the Vegas, Baby, Vegas! discussion board -- only at Fool.com.

Fool contributor Jeff Hwang owns none of the companies mentioned above.


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