Majestic Research

Reuters

MGM Mirage Profit Falls 30 Pct as Economy Slides

By Deena Beasley
Published: May 06, 2008

MGM Mirage Inc, the world’s second-largest casino operator, said on Tuesday quarterly profit fell 30 percent as a slower U.S. economy hit spending in Las Vegas.

But the company’s recently battered shares were up more than 6 percent after MGM said it is continuing to pursue ways to enhance revenue and reduce costs and suggested that the second quarter may see improved trends.

MGM is the fourth largest gaming company to report deteriorating quarterly earnings, following Las Vegas Sands Corp, Wynn Resorts Ltd and Boyd Gaming Corp last week. On Monday, privately held and highly leveraged casino operator Tropicana Entertainment LLC filed for bankruptcy protection.

MGM, which operates the Bellagio, Mandalay Bay and Circus Circus resorts in Las Vegas, said first-quarter net income fell to $118.3 million, or 40 cents per share, from $168.2 million, or 57 cents per share, a year before.

That missed Wall Street’s average forecast of 44 cents per share, according to Reuters Estimates.

“While the quarter wasn’t pretty, it wasn’t disastrous versus lowered expectations. We expect the stock to trade up this morning on relief,” said Morgan Stanley analyst Celeste Mellet Brown in a research note.

The stock was also up on a comment from Chief Executive Terry Lanni that MGM may seek in the future to spin off from its casino operations licensing and branding initiatives like planned non-gambling resorts in Abu Dhabi and China, said Robert LaFleur, an analyst at Susquehanna Financial.

The analyst called such a move very unlikely, especially in the near term, given that MGM makes nearly 85 percent of its profit on the Las Vegas Strip. “Right now its just a pipeline on a piece of paper,” he said.

Chief Operating Officer Jim Murren said MGM has been able to pull a number of costs out of its expense structure, including energy products, consulting, travel and advertising, as well as previously detailed payroll cuts.

“That’s why will you see our profitability and our margins actually holding up pretty well,” he said on a conference call.

MGM’s first-quarter revenue fell 2 percent to $1.9 billion, in line with analysts’ estimates, hurt by declines from table games at its key Las Vegas Strip casinos, including the Monte Carlo, which was out of commission for three weeks in the quarter after a rooftop fire.

“I think the sentiment is definitely pretty low on the Strip right now...Everyone is expecting lower numbers going forward,” said Matthew Jacob, an analyst at Majestic Research.

Expensive Vacation

Spending in Las Vegas is more firmly linked to the general economic cycle than in the past because the gambling mecca has become a much more expensive vacation, “especially if you are going to do it right at one of the newer properties,” he said.

“The first quarter was obviously challenging...We were clearly impacted by the economy,” said CEO Lanni.

Overall gaming revenue fell 3 percent, while slot machine revenue was down 1 percent.

Revenue from its hotel rooms fell 6 percent, with a 4 percent decrease in Las Vegas Strip revenue per available room, the main measure of growth in the hotel industry. MGM said average room rates fell 2 percent at its Las Vegas Strip resorts.

Murren said MGM expects a low-single-digit drop in second-quarter hotel revenue from a year earlier.

He also said convention business results are expected to post a single-digit drop in the second quarter, compared with a year-to-year decrease of about 10 percent in the first quarter.

MGM is developing a number of casinos, including the massive CityCenter project in Las Vegas and a $5 billion casino in Atlantic City, New Jersey. Last year it opened the MGM Grand Detroit and its first property in Macau, China’s gambling haven.

In August, MGM agreed to sell half of the CityCenter development of hotels, condos and retail outlets to Dubai World, which also plans to acquire a stake of up to 20 percent in MGM itself.

MGM shares, which have lost more than half their value since October, were up $3.12, or 6.4 percent, at $51.74 in afternoon trading on the New York Stock Exchange.