MGM Is Not a Lost Cause

• Report this Comment On August 04, 2009, at 9:41 PM, spokanimal wrote:

  Your last sentence was very well put, Matt (as follows):

  "Look to Wynn for the tightest-run company with the best balance sheet, Las Vegas Sands for the best global growth prospects, and MGM for the absolute lowest price."

  The problem is, I recently bought a gas-powered weed-whacker for the "absolute lowest price" and it lasted a total of 10 uses before it broke down.

  Even if MGM's properties are top notch (who could argue that Bellagio and MGM grand hotel are not?), they are only as good as their forward cash flow. The problem with the Vegas Strip is that it's turning around slowly (although it will definately get better), it's got 18000 hotel rooms coming online over the next 18 months, and it exists in a nation full of increasingly oppulant Tribal Resorts (tons of them in California... just ask the poor folks up in Reno). MGM will increase cash flow as the recovery ensues but it'll be slow... Vegas has finally matured and will never grow again as it once did... it's a casino nation and MGM has all their eggs in Vegas.

  Investing is all about good growth prospects that are reasonably priced. I would argue that MGM is only modestly more reasonably priced than Wynn and LVS but the later 2 companies derive 60 and 70% of their revenues respectively from Macau, which has FAR better growth prospects than Vegas. In fact, by this time next year, LVS should have over 85% of their revenues coming from the far-east, including white-hot, low tax, Singapore, where they hold one of only 2 licenses.

  Matt, I've floundered in a lot of value traps in my 55 years of life on this planet and I know one when I see it. MGM will thrive, but it's growth prospects would best be reflected by a P/E multiple of 9 or 10 by the year 2011. Jim Murren is right... focus more on MGM Macau and start diversifying their Vegas strip holdings... Wynn and LVS are way further up the curve he knows he needs to be on today.

  Spok

• Report this Comment On August 05, 2009, at 1:24 AM, TMFKopp wrote:

  @Spok

  "Investing is all about good growth prospects that are reasonably priced."

  That's certainly one way to approach it. Another is to find companies that are valued at less than the price of their net assets. As I noted in the article, the gaming industry currently offers opportunities at both.

  "MGM will thrive, but it's growth prospects would best be reflected by a P/E multiple of 9 or 10 by the year 2011."

  Far from being a value trap, this would validate exactly what I'm saying about MGM. Hold it until it's priced more accurately for the assets that it holds, then bail. I don't know that I've ever said MGM has better growth prospects than LVS or WYNN...

  Matt

• Report this Comment On August 05, 2009, at 1:10 PM, spokanimal wrote:

  @Kopp

  You're point is well taken, and supported by the fact that MGM has had a good, anticipatory run this spring during the "multiple expansion" phase of this economic recovery. You're thinking certainly exceeds that of Mr. Steyer.

  Asset plays have merit, especially for those looking to sacrifice some upside for the downside protection afforded by the value of the assets that are not reflected in the stock price at the time of purchase.

  20 years or so ago, before I fully appreciated that, I took my turns with Weyerhauser and their 6 million acres of owned, timberland (and 3 times that under long-term lease in Canada) and watched it do little. Value Line screens regularly identify such "deep value" companies as those priced below book, as well as those priced below liquidating value. Tejon Ranch was another that wedged it's way into my portfolios.

  MGM is value priced for sure and I believe they will recover some more because Vegas will improve with the economy. The problem is, it's very big, the Tribals and the new reality of fuel prices, and the magnitude of partly-built new-capacity, are going to keep things overly competitive there compeletly through the upcoming recovery, in my opinion.

  A value trap always has undervalued assets, as measured by replacement value, but it's a trap because of

  the value of the assets as tools for the generation of EBITDA discounted out over a future period of time. My time as an investor has taught me repeatedly that if the discounted cash flow isn't likely to be there, the stock will have difficulty rising seriously off of book.

  Even as MGM moves higher with economic recovery, the context of your piece was comparative by virtue of the fact that it contrasts it with the investment attributes of LVS and Wynn. Given the replacement value of their assets (which is high) plus what will likely be a far higher forward EBITDA generating value in Macau, Singapore and even Bethlehem PA, I couldn't be more certain that LVS and Wynn represent far better value based on both methods of determining asset value at present market value.

  Thansk Matt... excellent discourse!

  Spokanimal

• Report this Comment On August 11, 2009, at 2:08 PM, TMFKopp wrote:

  Back @ Spok

  You certainly make good points, but I think we can agree that properties like Bellagio and the soon-to-be CityCenter are very different than considering the asset value timberland or a manufacturing plant.

  And thinking about the picture from the cash flow angle, we've got to recognize that as laughable as properties like Circus Circus and Slots-A-Fun are, they are bringing in very real cash.

  Not to sound like a broken record, but I'll just reiterate that between the big three casino players we're looking at two very different investments. With WYNN and LVS you've got quality companies that should be bought to hold. MGM, on the other hand, should be bought to get back to a reasonable multiple of its book value and then cast off (unless, of course, significant strategic and operational changes take place in the meantime).

  Thanks for providing some good counterpoints.

  Matt

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