Don't Be Fooled by MGM's Profitable Quarter

The headlines immediately following the release of MGM Mirage's (NYSE: MGM  ) first-quarter earnings yesterday highlighted the $0.38 in earnings per share that the casino operator reported. For a highly indebted gaming company that's had the cloud of bankruptcy looming, a quarter like that would have been great. Of course, I say "would have" because the reported results are a bit misleading.

During the quarter, MGM closed on the sale of its TI property -- the sexed-up transformation of the Treasure Island -- which resulted in a $190 million gain. The company also benefitted from $22 million from various insurance payouts stemming from the fire at the Monte Carlo back in early 2008.

Back the above items out of earnings -- and we'll even give MGM credit for the one-time preopening and start-up costs that it spent -- and that nice-looking $0.38 per share falls to a $0.10 loss. For those keeping score with Wall Street, that was $0.03 below what analysts had been expecting.

The results were affected by what you might expect -- conventions were canceled, people were jamming fewer coins into the slots, and rooms were tougher to book. The only holdout for the company appeared to be the high-end gambler; MGM reported that its baccarat volume was down just 1%.

While this helped MGM, it could be even better news for Wynn (Nasdaq: WYNN  ) and Las Vegas Sands (NYSE: LVS  ) , both of which have fewer properties and focus more on the higher end of the market.

Now bulls will most likely either take issue with my characterization of MGM's results or suggest that they're a relatively meaningless look backward. After all, the media is talking about green shoots, mustard seeds, and a whole mess of other gardening metaphors.

A general air of bullishness has been boosting the entire casino industry from MGM and Wynn to Melco Crown Entertainment (Nasdaq: MPEL  ) and Boyd Gaming (NYSE: BYD  ) . And, heck, I'll even concede that last week's news about MGM's new financing arrangement was much more significant than yesterday's earnings report.

But let's not get ahead of ourselves here. Once we back out the one-time events from MGM's results, EBITDA fell 38% from last year to about $350 million, which gives the company a meager two-times interest coverage. The company may have a pass from its lenders for the next few months, but unless those green shoots turn into full-blown flowers for MGM soon, it could face some tough decisions.

Bear in mind that even if bankruptcy isn't the fate of the company, harsher lending terms, asset sales under duress, and the like can all be bad news for equity investors.

So while I most certainly tip my hat to MGM and its management team for staying afloat -- not to mention keeping up the CityCenter construction -- I maintain that it's best to be very picky about where you fish in the gaming industry, and know when you are investing and when you are gambling.

Further Foolishness:

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Fool contributor Matt Koppenheffer does not own shares of any of the companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool. The Fool's disclosure policy has never once been caught with its pants down. Of course, it doesn't actually wear pants.


Read/Post Comments (13) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 05, 2009, at 1:55 PM, annaboton wrote:

    Buy MGM or you guys would regret about your misfortune next few weeks.

  • Report this Comment On May 05, 2009, at 1:57 PM, annaboton wrote:

    Buy MGM or you guys would regret about your misfortune like Cramer - He always said MGM and LVS do not rock the bottom when these stocks having price - $2 Hic hic

  • Report this Comment On May 05, 2009, at 2:04 PM, omegamel wrote:

    How many anti-casino articles are you guys going write? You didn't mention the good news, that hotel bookings were back to 95% capacity. Lenders will always work with the big boys (MGM, LVS, WYNN) and resolve the debt issues. Casino stocks will continue to rise to their average levels before the crash.

  • Report this Comment On May 05, 2009, at 2:15 PM, annaboton wrote:

    Hello Mr. Cramer,

    Last month I emailed to you concerning to your series of anti-casino articles and video, I bet you to see what would happen to these stocks in May, and you did not answer. Now you see ? Do you agree when I call you a flp-flop and fooled stock analyzer.

  • Report this Comment On May 05, 2009, at 2:21 PM, annaboton wrote:

    Hi Cramer,

    What are you thinking now ? regret, upset, despearate ... Lat month, I emailed you concerning to a series anti-casino articles and video, and I bet you to see what would happen in May. Right? You did not answer my email. Do you agree when I said you are a flip-flop and fooled stock adviser?

    Thanks.

  • Report this Comment On May 05, 2009, at 2:48 PM, eatenbybears wrote:

    It is gambling, thing is, it was at $137.00 share also.

    Seemed there was always some expansion, new dream or revamp that would add to the casino debt pile.

    Can the traffic pick up again?

    Will business launch back into shows and conventions if the economy turns?

    What will happen when all the homes are sold in Vegas and the builders, speculators and lookers come back

    It's all a gamble ... look at the rise in home builder stocks. Sometime you buy low just because you can.

    Bears

  • Report this Comment On May 05, 2009, at 3:20 PM, jettson12 wrote:

    Another casino bashing article? Weren't you the moron who said you would not touch the casino stocks with a 10 foot pole when they were at $7?

    HAHAHAHAHHAHAHAH

    You have the audacity to come back and write another bs article? Get a life dude you are wrong on casinos and the more you write the bigger schmoe you look like. Get a clue.

  • Report this Comment On May 05, 2009, at 3:38 PM, DoLaugh wrote:

    Wow Dude...get a life...coer your shorts on whatever gambling stocks you are shorting.

    Have you gone to Las Vegas lately???

  • Report this Comment On May 05, 2009, at 3:38 PM, NJKev wrote:

    I heard a stat today that there's about $4 trillion sitting in money funds right now and about another $4 trillion sitting in banks. As soon as people start to feel a little better about themselves & the economy, they're gonna start to move that cash around, whether that be investing some of it or spending on what they feel is a well deserved vacation, etc. Vegas (especially the new City Center due to open in Dec.) will certainly benefit from that cash moving around. The company sales trips & conventions will also return to the strip as it is only a handful of places that can handle really large groups. Also, let's not forget how short the American people's memory is...(pun intended). As soon as Main St. feels better about themselves, those company trips & conventions will be below the media's radar because Main St. won't give a s*** about it. There'll be bigger fish to fry for the media. Vegas went thru a trying time, but once again, they'll be fine & bigger & better than ever.

  • Report this Comment On May 05, 2009, at 3:50 PM, TMFKopp wrote:

    @Bears

    "It's all a gamble"

    Come on Bears, you know better than that! You do your analysis and find good companies that you can count on to produce solid results over a long period of time and you invest.

    Sure there are gambles and there are gambles that can pay off quite well. Look at MGM -- perfect example. Buying MGM at its lows wasn't a conservative investment in a well capitalized company that's been steadily chugging along, it was a bet on MGM's lenders being willing to work with the company rather than push it into bankruptcy.

    The roulette wheel came up black and those who bet on MGM have won big, but if it had come up red then equity investors could have been looking at a near 100% loss.

    The key is understanding when you are making a conservative investment and when you are gambling.

    @jettson12

    "Weren't you the moron who said you would not touch the casino stocks with a 10 foot pole when they were at $7?"

    I have no idea what you're talking about. If you're going to make an asinine remark like that, why not provide a link?

    Matt

  • Report this Comment On May 05, 2009, at 4:30 PM, rstanberry wrote:

    FYI Matt they don't use coins in slot machines anymore. We recycled over 750,000 old slot machine tokens last month. Gaming stocks are the epitome of gambling, and of course it is also a Sin Stock. No bailouts for gambling establishments eh Mr Obama? I for one am estatic to see the loans shored up and the company moving forward. But I also fear that these articles are to assist short sellers and that is about it.

  • Report this Comment On May 05, 2009, at 5:41 PM, Ibeatmykids wrote:

    Of course these bearish articles are for shorts. For any real investor buying MGM at its' low point was a dream come true. Now I will patiently sit on my shares while the market does its thing and Matt can keep writing his articles and all I will do is read them for entertainment. Assuming that MGM survives which I am almost positive they will, I wont be selling these shares until they are in excess of $100.

    Simply put this article is directly targeted towards the shorts.

  • Report this Comment On May 05, 2009, at 6:24 PM, jettson12 wrote:

    You have been bashing Casinos stocks for WEEKS kopp just look at your articles. THEY ARE NOT GOING BANKRUPT. Get over it you were wrong. They hit bottom and they bounced back.

    In 2 years casino stocks will return to their highs...by that time the economy will be rolling again.

    Drop your short position.

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