MGM Resorts International (MGM 0.90%) surprised analysts with their Q4 and 2014 year end earnings-and not in a good way. While the company posted some significant advances and exciting new opportunities, the company's loss widened even further in this recent quarter from the losses posted a year ago.
MGM Resorts has been some what of a market darling during the second half of 2014 as Las Vegas Sands (LVS -0.92%) and Wynn Resorts (WYNN -1.16%) faced major challenges in Macau.
MGM Resorts International reported its best fourth quarter EBITDA since the peak in 2007 and its best full year in six years at its wholly owned domestic resorts. -- MGM Resorts CEO James Murren during this Q4 2014 earnings release
That statement from Murren is probably not a good thing to remind us about, that this quarter of losses is the best performance by the company in nearly 8 years. Thanks to better than expected Las Vegas growth and MGM's dominating presence there, investors had hope that MGM's 2014 numbers were going to look better than before. Unfortunately, and despite a muted share price response, this surprise is not a good one.
Diluted loss per share for the fourth quarter of 2014 was $0.70 compared to diluted loss per share of $0.12 in the prior year fourth quarter. -- MGM Q4 Earnings
The good first: Vegas hotels and Macau's middle class
There are two parts of this earnings report that we should be focusing on now as the rays of hope. For one thing, MGM is the dominant operator in Las Vegas. While Las Vegas has seen a slow recovery since the U.S. recession of 2008, things are starting to pick up there, and MGM is benefiting not only from having the most properties there, but especially from having the most hotel rooms.
MGM's domestic revenues increased 5% year over year in Q4, thanks in part to a 6% increase in rooms revenue year over year. This was due to both rising occupancy and higher room rates, which has led to an increase in MGM's overall revenue per available room (RevPAR) at its huge number of Las Vegas hotel rooms. In total, MGM's total room counts accounts for about 25% of the total hotel room market in Las Vegas.
Sources: Las Vegas Convention and Authority (LVCVA.com) and each companies' earnings
Then on to China. While the total revenue decline of 22% year over year in Macau (due to the massive 39% decline in VIP revenues) is discouraging, MGM did see a strong rise of 19% year over year in its main table games. This is the segment known as the "mass market" in Macau. The main issue driving down Macau revenues is increased regulation and other factors that drive VIP gaming which used to be a staple of Macau's industry. However, mass market gaming is helping to drive Macau forward through its current slump, and will eventually be the main driving force of increased profits there. Its a good sign that MGM is increasing nicely in this segment.
Now the bad: Income losses widen... again
What's not surprising about these results, is that they are similar to what we saw in Q3 2014. That is, rising revenue, especially hotel revenue, in Las Vegas is a highlight for the company, and that rising mass market revenue in Macau, regardless of revenue losses due to the loss of much of the VIP segment, is driving growth now. What is surprising is that even those these two areas continue to do well, these advances are not helping to mitigate MGM's losses, but now those losses are even wider.
The reason these losses look extra bad is the continued pressure on Macau total revenues, and a very poor year over year for CityCenter in Las Vegas. Those Macau losses resulted in a very large total income decline for the company's Chinese operations. In Las Vegas, the decrease in gambling operations (decreased table games volume and hold), as well as a $39 million dollar settlement for there property-related issues, meant that MGM had little chance of coming back.
For the 2014 year total, the story is less grim. The company was able to narrow losses, reporting a $0.31 loss per share, compared to a $0.35 loss per share in 2013. Still, this is significant especially in comparison to how well top competitor Las Vegas Sands has been able to do in the recent quarter, in spite of of being much more heavily invested in Macau than MGM.
Is MGM a good bet? Not in this industry
It's not fair to pin these revenue declines in Macau on MGM alone. Every major international gaming company has felt its own pain during this time of huge setback in Macau. However, not all companies are reporting these kinds of losses.
Take Las Vegas Sands for example, which recently released Q4 results that showed not losses, but incredible growth rates despite the issues in Macau. While the company also suffered form those VIP revenue declines, its Chinese operations earnings still increased due to great cost management and even more rising mass market revenue than MGM. Additionally, its Singapore operations made huge gains that carried the company on to a very profitable quarter, providing much more income that the company could have hoped for by focusing on Las Vegas instead.
MGM does have some things going for it. Particularly its hotel segment in Las Vegas, and for those who want to make a bet on Las Vegas, this is the company dominating there. But on a global scale, and for investors looking to make a strong bet on a casino company, MGM is probably not it. This surprisingly poor quarter proves it.
