MGM: Q2 DOESN’T MATTER BUT EVERYTHING ELSE DOES

MGM MIRAGE will release EPS on Tuesday before the open. There is chatter that Q2 wasn’t “that bad” despite some horrible May Strip gaming revenues released by Nevada. Does that mean I want to rush out and buy the stock? Probably not. The major issues MGM faces are prospective from Q2, not least of which are related to CityCenter and liquidity issues, potentially as early as 2009. Let’s delve into the issues that actually do matter and will hopefully be addressed on the call.

  • 1. Room rates moving back to loss leader status – I’ve written extensively about rates regressing to the mean. LV casinos need occupancy to fill the big fixed cost structure known as the casino. Casinos drop rates faster than Seldon hit the deck against Tyson at the MGM Grand in 1996. Rate changes fall right to the bottom line. The first chart highlights ADR as a clear driver of EBITDA margin.

  • CityCenter financing – This is certainly not the environment to be raising billions of project financing for a consumer centric project. Currently, MGM is kicking in $100m a month to the project until financing can be arranged.

  • MGM MIRAGE liquidity – MGM management was smart and fortunate to sign such a flexible and low cost credit facility. The problem is that it matures in 2011. The bigger problem is that the company will exhaust its availability, sometime in 2010, unless they obtain additional financing. As the second chart shows, MGM’s liquidity position is tenuous as early as 2009 if they are forced to fund CityCenter throughout 2008.

  • Potential Condo cancellations – MGM has indicated that the $8.5bn CityCenter price tag is net of $2.7bn in residential sales. The company won’t come close to this number. The rate of current cancellations is meaningless. Buyers will wait until the last minute to cancel. It’s a simple decision: First, do I still have the financial position to afford this thing; Second, does the drop in value since I signed on exceed my deposit. The first is unknown but in many cases a no, the second is probably a yes.

  • The dollar – Where would MGM’s results be without the weak dollar attracting significant foreign visitation. The company recently indicated that the percent of visitors at the Bellagio is triple the normal percentage. If the Fed starts raising interest rates and the US consumer economy remains soft, look out.

  • 2009 Recovery – Why is management confident that there will be a recovery in 2009?

  • MGM’s senior management team could be the smartest in the business. They’ve got some big hurdles to overcome. Let’s hope they outline their plan to address these issues as early as the Q2 conference call next week.

MGM's margins benefitted immensely from higher ADRs
MGM's liquidity position assuming company funding of CityCenter throughout 2008

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