Analysts Disappointed with Mandalay's Performance

LAS VEGAS -- Despite the absence of an active convention calendar, Mandalay Resort Group cobbled together record earnings for its just-ended fiscal second quarter, company President Glenn Schaeffer said Thursday.

Analysts, however, were disappointed, noting the company's performance fell short of Wall Street expectations and was simply not as strong as it had been in recent quarters.

"The results clearly were disappointing, but not overly surprising given our market surveys for June and July," Deutsche Bank analyst Marc Falcone said.

Joe Greff, gaming analyst at Fulcrum Global Partners, an independent Wall Street investment research firm, called the performance "a miss" for Mandalay.

"We hadn't seen that from them in a while, but most investors were expecting a deceleration (following the company's run of) ridiculously successful record performances," he said.

Net income in the company's second quarter increased to $58.2 million, or 85 cents per diluted share, up 37.5 percent from $42.3 million, or 67 cents a share, a year earlier.

Eric Hausler, gaming analyst for Susquehanna Financial Group, said Mandalay fell more than 20 percent short of Wall Street's projected earnings of $1.03 per share.

Earnings before interest, taxes, depreciation and amortization increased to $188.7 million, up 9.6 percent from $172.1 million in the same quarter of 2003.

Revenue rose 10.7 percent to $713.8 million from $644.8 million.

Schaeffer said the quarter represented a break-out performance for Mandalay, and was in line with the growth trend Mandalay started on more than a year ago.

However, Schaeffer said comparisons with the previous year were difficult because of anomalous events in 2003 and 2004.

Earnings in the just-ended quarter were tamped down by a $7.3 million, or 20 percent, increase in health care costs; a below normal table hold percentage at Mandalay Bay, which cost the company $3.2 million; and an increased effective tax rate, thanks largely to operations in the Midwest.

Mandalay Treasurer Les Martin said the the company had a run of catastrophic experiences that led to the spike in health-care costs, and that by and large they should trend toward more normal levels over the remainder of the year.

Schaeffer also explained the table hold issue by saying that players, after all, sometimes win as well.

Hausler said those events combined explained most of the shortfall Mandalay had.

Comparison difficulties were compounded by one-time events in the same period as a year ago, including a $6.3 million loss on the early retirement of debt, a gain of $4 million on the company's executive retirement plan and the reversal of $1.8 million in management fee income related to MotorCity Casino in Detroit.

Sorting out all the one-time factors, Schaeffer said the company's fundamental operating earnings per share were closer to $1 than the reported 85 cents.

However, Schaeffer said convention business and leisure travel were both unusually light in July and August, but he said the convention calendar is running distinctly ahead of last year for the remainder of 2004.

Falcone said Mandalay's tepid performance underscores the importance of the convention model to the success of the company and its business overall.

Schaeffer said it is too early to say how September is shaping up, but October looks like it will be a particularly strong month.

The company's Strip properties put in the strongest performance in the second quarter with earnings before interest, taxes, depreciation and amortization of $17.6 million, up 14 percent from a year earlier, he said

Schaeffer said the success on the Strip was driven by a 12 percent increase in revenue per available room and an 8 percent increase in casino revenues.

Mandalay Bay, Luxor and Excalibur all posted record second-quarter earnings, he said.

Schaeffer declined to comment on issues involved in the $7.9 billion sale of the company to MGM Mirage except to say "our friends ... are poised to acquire a winner."

But Joe Greff said the deal makes at least as much sense for MGM Mirage despite the earnings shortfall, and perhaps more as Mandalay's growth rate normalizes.

Mandalay closed Thursday at $67.85, up 13 cents or 0.19 percent on normal trading volume.