Please ensure Javascript is enabled for purposes of website accessibility

Don't Be Fooled by MGM's Profitable Quarter

By Matt Koppenheffer – Updated Apr 6, 2017 at 2:13AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

A bottom line solidly in the black doesn't tell the whole story.

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:

Melco Crown Entertainment is a Motley Fool Global Gains recommendation. Try any of our Foolish newsletters today, free for 30 days

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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

MGM Resorts International Stock Quote
MGM Resorts International
MGM
$30.05 (-1.83%) $0.56
Wynn Resorts, Limited Stock Quote
Wynn Resorts, Limited
WYNN
$59.65 (-0.90%) $0.54
Boyd Gaming Corporation Stock Quote
Boyd Gaming Corporation
BYD
$47.02 (-2.91%) $-1.41
Las Vegas Sands Stock Quote
Las Vegas Sands
LVS
$35.47 (0.51%) $0.18
Melco Crown Entertainment Limited Stock Quote
Melco Crown Entertainment Limited
MLCO
$5.30 (1.73%) $0.09

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
339%
 
S&P 500 Returns
109%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.