Majestic Research

Reuters

Casino Operators Harrah's, MGM Post Higher Profit

By Deena Beasley
Published: April 27, 2006

LOS ANGELES, April 27 (Reuters) - The world’s two largest casino operators on Thursday banked higher than expected first-quarter earnings as spending on gambling, entertainment and hotels in Las Vegas and Atlantic City continued to rise.

Net income at Harrah’s Entertainment Inc. , the No. 1 gambling operator, rose 76 percent to $182.4 million, helped by the company’s June 2005 acquisition of Caesars Entertainment. Revenue nearly doubled to $2.4 billion.

No. 2 casino company MGM Mirage , which acquired rival Mandalay Resorts a year ago, saw its net profit rise nearly 30 percent to $114 million, while revenue rose 56 percent to $1.9 billion.

Shares of both Las Vegas-based companies were up about 2 percent in late trading on the New York Stock Exchange.

Analysts said Harrah’s investors were likely tempered by announcement of plans to spend $485 million to renovate and expand the company’s Hammond, Indiana, casino.

“To get the proper returns, they would have to get a doubling of EBITDA (earnings before interest, taxes, depreciation and amortization) at the property,” said Matthew Jacob, an analyst at Majestic Research.

With MGM, there was some confusion over its second-quarter outlook after the company said it will no longer report a number that strips out one-time charges and gains.

But both companies beat Wall Street expectations for the first quarter, with MGM posting an adjusted profit of 56 cents a share, topping the average analyst estimate of 51 cents, as compiled by Reuters Estimates.

Harrah’s reported earnings excluding one-time items of $1.02 per share versus the average analyst estimate of 91 cents.

“The Caesar’s integration into Total Rewards appears to be capturing a lot of customers,” said Smedes Rose, an analyst at Calyon Securities.

Total Rewards is Harrah’s customer-loyalty program.  The company said it has finished combining the Caesars properties into the program ahead of schedule.

Harrah’s Chief Executive Gary Loveman said Harrah’s has already reached its projected $80 million first-year target for cost savings and revenue gains for the Caesars properties, and it now expects to approach $300 million by June 2007.

Sales at Harrah’s properties open for a year or longer—excluding those affected by last year’s U.S. Gulf Coast hurricanes and Caesars properties—increased 10.8 percent.

Net revenue at MGM properties open at least a year rose 4 percent in the latest quarter, while same-store gaming revenue was up 2 percent and non-gaming sales up 5 percent.

“The comparisons are getting tougher,” said Deutsche Bank analyst Marc Falcone, referring to the fact that many Las Vegas casinos have seen double-digit revenue growth over the past couple of years as tourism rebounded and operators succeeded in boosting returns with new amenities like spas, gourmet restaurants and luxury hotel towers.

MGM forecast earnings per share in the second quarter of 50 cents, including 4 cents of stock option expense, 6 cents to 8 cents of other expenses and an 8-cent gain related to condominium sales.

Analysts had projected 49 cents a share, but it was not clear whether some of their estimates included the condo gain.

Harrah’s did not provide a forward outlook, but Loveman said the company expects to “see substantially increased revenue and profit gains ... during the latter half of this year as we begin to leverage the Caesars business.”

MGM said Las Vegas convention bookings are up about 5.5 percent in the second quarter for its Mirage properties, with average daily rates up about 3 percent. For Mandalay properties, second-quarter bookings are up 16 percent, with rates up about 2 percent, the company said.

On the east side of the Las Vegas Strip, MGM is building a $7 billion mixed-use project called CityCenter. Loveman said Harrah’s will unveil in the third quarter plans for redevelopment of its block of properties across the street.

MGM Chief Executive Terry Lanni said MGM is on track to open a permanent replacement to its Detroit casino in late 2007 and to debut its Macau resort in the fourth quarter of 2007.

Both MGM and Harrah’s are finalists in a competition to build one of two planned casino resorts in the island nation of Singapore.  The Singapore government is expected to announce the winning bid by June.

Harrah’s is also developing casino resorts in the Bahamas, Spain and Slovenia.

The company’s share were up $1.83, or 2.3 percent, at $80.10 in late trading on the New York Stock Exchange, while MGM was up 82 cents, or 1.9 percent, at $44.76.

Year-to-date, shares of Harrah’s are up more than 12 percent, compared with a gain of 22 percent for MGM and 25 percent for the Dow Jones U.S. Gambling Index <.DJUSCA>.