MGM: MANAGEMENT NOT PESSIMISTIC

MGM management has met with a lot of investors as of late in addition to trying to raise $3bn for CityCenter. The company has been pretty consistent with its commentary that Q3 is a lot like Q2 and Q4 looks better. Of course, it depends on what metrics are used for the comparison. When times get tough, gaming management teams tend to focus investors on occupancy rates to give the impression that Las Vegas is still in demand. Unlike other hotel markets, Las Vegas casino hotels cut rates to sustain occupancies so occupancy is a poor measure of the underlying demand. I believe the decline in Q4 room rates will look worse than Q2.

The other major focus is gaming revenues. July’s 15% decline in Strip revenues was horrendous. The only August data to be release thus far was the McCarran Airport passenger data which actually deteriorated from July (-9.9% vs. -8.6%). However, the comparison breakdown is completely different: The 2008 July table hold percentage came in well below 2007. August gaming revenue may only fall low to mid single digits as table drop in August 2007 was abnormally low and slot hold percentage was also low. Given the investors’ reaction to the airport data (MGM down 13% in a down market), I would expect a positive reaction to any Strip gaming revenue decline less than the airport traffic decline. These numbers should be released between October 8-10th.

The August gaming revenue release may be the last positive data point for Las Vegas for some time, however. The trend is firmly in negative territory. Room rates are likely falling at a faster rate. Table drop and slot volume trends are declining, even though the near term trade is better (but still negative). Gaming revenue comps may be where MGM is getting its Q4 optimism. Sequential Q2-Q4 comps last year were 4%, 6%, -1%, respectively. However, with less airline capacity and higher airfares, already pinched consumers, and slowing global economies, my money would be on a weaker Q4, not a stronger one. And I am a betting man. As discussed in my 8/06/08 post “MGM: SOOTHSAYERS OR HOPEFUL AGNOSTICS”, MGM management actually has about as much visibility as we do on the Q4. We’re data dependent here at Research Edge and the data is certainly not making me feel better about Q4.


Easy Aug comps could be near term catalyst but underlying metrics are in decline

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