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Best of Howard Stutz

Gaming Guru

Howard Stutz

Earnings: MGM Mirage profits slide

7 May 2008

LAS VEGAS, Nevada -- MGM Mirage Chairman and Chief Executive Officer Terry Lanni's suggestion that the gaming company could be split in two sent the company's stock up the most in eight months despite news that its quarterly earnings were down 30 percent.

The souring national economy, which kept many potential MGM Mirage customers away from the company's 10 Strip resorts, was a primary factor as the casino operator said its profits were $50 million less than a year ago. MGM Mirage said higher costs due to the openings of two resorts plus the three-week closure of the Monte Carlo from a Jan. 25 rooftop fire drove results even lower.

Nevertheless, Lanni was able to put a positive spin on the three months that ended March 31.

"All things considered, it was pretty good quarter," Lanni said, citing quarterly losses that were reported last month by rivals Las Vegas Sands Corp. and Boyd Gaming Corp. "These are tough times, but not impossible times. The economy could be better, but that's something we have to deal with. This is where management earns their salaries."

Lanni also helped spur a 6.64 rise in the company's stock, the biggest jump since August, when he said the company could divide into separate publicly traded hotel and casino operations, in answer to a question posed by Deutsche Bank analyst Bill Lerner.

The company's stock rose $3.23 to $51.85 in New York Stock Exchange composite trading. The shares have declined 38 percent this year.

MGM Mirage formed a nongaming hotel subsidiary last year to develop luxury hotel properties worldwide. Lanni told Lerner that he has been frustrated by the favorable multiples pure hotel companies enjoy compared with gaming companies.

"If that continued to be the factor, we could certainly split the companies," Lanni said.

After the call, Chief Financial Officer Dan D'Arrigo added: "We could maximize value for our investors in due course by spinning them out. This is been the foundation from which we have always considered going down this path."

D'Arrigo said the company has no timeline for a breakup.

Still, "today's comments by management confirm that the split is a question of when, and not if," Amit Kapoor, an analyst at Gabelli & Co., wrote in an e-mail after the call.

MGM Mirage said it earned $118.3 million during the quarter, or 40 cents a share, down from $168.2 million, or 57 cents a share, a year earlier. Analysts polled by Thomson Financial expected the company to earn 43 cents per share.

Revenue fell 2.6 percent, to $1.88 billion from $1.93 billion. MGM Mirage posted low single-digit percentage decreases in both gaming and nongaming revenues. Room revenues from the company's Strip resorts decreased 6 percent and average room rates were down 2 percent.

The fire at the Monte Carlo shut the Strip resort through Feb. 14 and caused the property's cash flow to fall to $14 million compared with $34 million a year ago. Roughly 20 percent of the resort's 3,000 hotel rooms were still out of service at the end of the March.

Meanwhile, the unveiling of the $1.25 billion MGM Grand Macau in December, which followed the opening of the $800 million MGM Grand Detroit in October, caused the company's operating income to drop some 23 percent because of costs related to the two events.

Lanni said in an interview that several steps need to be taken to right the nation's economy. Until then, the gaming industry needs to work to strengthen its financial position.

Despite the softening credit markets, Lanni said the company's primary short-term efforts include fully financing the under-construction CityCenter development, which now carries an $8.4 billion price. Afterward, the company will focus on a proposed $5 billion development in Atlantic City and a joint-venture development with Kerzner Holdings International on the Strip's north end.

"We expect CityCenter to be fully financed over the next few months," Lanni said. "That is our clear, No. 1 goal."

Wall Street was not surprised by MGM Mirage's first quarter results, following an $11.2 million quarterly loss reported by Las Vegas Sands, a $32.6 million first-quarter loss reported by Boyd, and a 20 percent drop in profit by Wynn Resorts Ltd.

"We think results, particularly in Las Vegas, were likely above the worst-case scenario that had been recently priced in (MGM Mirage shares)," Bear Stearns gaming analyst Joe Greff said in a note to investors.

Several analysts thought the company's stock price, in a free fall since the end of the year, might react positively to the earnings.

"The lower revenue and profitability were expected in the first-quarter results, given the deteriorating trends on the Strip," Oppenheimer analyst David Katz said in an investors note.

Susquehanna Financial Group gaming analyst Robert LaFleur said the company's Strip resorts didn't reach the marks he set for investors.

"We were somewhat surprised by the weakness in the higher-end," LaFleur said in a note to investors. "On the Las Vegas Strip, the higher end properties, Bellagio and MGM Grand, both meaningfully missed our (cash flow) estimates. While not unexpected, the majority of the properties under performed. The company has become more dependent on nongaming amenities, which are not as resistant to recession as casino revenue."

Cash flow, defined as earnings before interest, taxes, depreciation and amortization, fell to $535.6 million in the quarter, compared with $613.4 million a year ago.

Earnings: MGM Mirage profits slide is republished from