MGM MANAGEMENT: SOOTHSAYERS OR HOPEFUL AGNOSTICS?

MGM got some investors juiced and shorts scared with its conference call commentary yesterday. Management proclaimed Q2 the trough and declared that Q4 would show improvement and be the strongest quarter of the year. Forward bookings were cited as driving the Q4 and 2009 optimism. What? Visibility past 1 quarter has been notoriously cloudy in this business, even in boom periods. Looking back just a few quarters shows the fallacy of these predictions. During the Q3 2007 conference call, management declared that into 2008 “you should expect to see a fairly substantial increase in revenue and a resulting improvement in margins”. Check out the following chart to see how that forecast worked out. I’m not highlighting this to call out management for being wrong. I’ve been wrong many times. Rather, I’m simply suggesting that management doesn’t know what Q4 will bring.

Booking windows in Las Vegas are short even when times are good. They are even shorter in a consumer slowdown. Strip casinos, especially high end properties like Bellagio and MGM Grand, generate much of their profits in the last week of the year. That week is notoriously unpredictable. Unless management discovered some groundbreaking forecasting tool, I’m not buying it. Just as they lack visibility into Q4, I also cannot see that far. However, we are data dependent here at Research Edge and the data supports continued weakness. Hotel and slot trends are moving in the wrong direction and critical factors such airline capacity, airfares, travel, consumer spending trends, etc. suggest that they will continue to do so.

MGM's last prediction didn't exactly work out

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