MGM: ESTIMATES ARE STARTING TO LOOK AGGRESSIVE

MGM may have trouble making consensus Q2 EBITDA estimates. A Q2 miss may mean more to investors than the Q1 miss.

Paulson & Company took a big stake in three gaming companies:  MGM, BYD, and HET.  In each case, the successful hedge fund manager took on significant exposure to the three worst performing casino markets:  Las Vegas Strip, Las Vegas Locals, and Atlantic City.  What is he thinking?

We don’t have a line in to John Paulson but he is clearly making a recovery bet.  Those three markets were hit the hardest, so a trough to peak recovery would be the greatest.  Moreover, these markets have not begun to recover.  We won’t take issue with the BYD bet on the LV locals market other than the timing. 

The problem with the MGM bet is two-fold.  First, the likelihood of MGM missing the Q2 consensus estimate is high which means forward estimates will have to come down.  So much for a V-shaped recovery.  Second, MGM’s valuation seems to already reflect expectations of a V-shaped recovery.  Granted, our estimates are below the Street, but MGM’s enterprise value multiple of 2011 EBITDA is right at 12.6x.  I’ve covered this sector since 1996 (I’m old) and double digit multiples for Las Vegas assets have been generally confined to periods of cheap money and sub 4x leverage.  MGM currently has a leverage ratio of around 9x.  Bulls better hope for a V-shaped recovery, although hope is not an investment process.

The following chart shows our estimates relative to the Street's for MGM’s Las Vegas Strip EBITDA.  We present this comparison because this is where we really differ from the Street.  On a consolidated, as reported, basis, our 2011 EBITDA estimate is $1.15 billion versus the Street at $1.40 billion.  We think the Street will come down in 2010 and 2011, closer to our estimates following the Q2 release.

MGM: ESTIMATES ARE STARTING TO LOOK AGGRESSIVE   - mgm

Macau is the one strong market for MGM.  However, they continue to underperform in that market following a surge in share late last year.  Investors expecting a Macau IPO catalyst for MGM may be disappointed.  We think MGM will generate significantly below the $500 million that some expect.