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About a month ago, I wrote about buying MGM and my expectations regarding the stock. Well, last week the reported blowout earnings. $.53/share for the quarter vs. estimates of $.41 on average in the market.

This takes my year-end number now to $2.05 (adjusting for the .13 beat) and I think, if the economy holds together, could be conservative. The company bought a bunch of stock back at an average price of $38 and still has 8 million shares that can be purchased. EBITDA growth was solid contributing further helping the bottom-line.

Going forward, the company forecasted earnings in the 40 to 45 cent range which is below the consensus and may be a reason stock price sank on Thursday. The management was being conservative though on the conference call , in my opinion. It was even mentioned that they normally did not give guidance in the past for the further quarter because the quarter is “so back end loaded.”

However, MGM management did say that the soft spot in the last quarter as followed by a strong finish and this strength has continued into the current quarter. There was mention that the gulf business should continue to improve.

In looking at the whole picture, here is an update on where I think things are going forward for MGM.

Fundamental Story
As I mentioned, I am forecasting $2.05 for the year for MGM which an adjustment up from my $1.92 forecast at last report. For 2007, I have raised my estimates there to $2.50 which implies equals 22% growth. Since I would imagine analysts will be adjusting numbers overnight, I do not have up to date comparisons. Based on numbers before the report, Yahoo! shows earnings expectations at $1.88 for 2006 and $2.04 for 2007.

As for EBITDA growth, my EBITDA margin forecast may be too high at 33% for 2006 but I am remaining there for the moment while I do some more analysis on the stock. Based on these estimates, the company is trading at 21x my 2006 estimate and 17x my 2007 estimate. As I expect growth of 22%, the company is trading at a discount to that growth.

Economic Impact

I am bit concerned on this end in regards to MGM. As I mentioned previously, MGM tends to track the direction of the 5 year notes’ yield. Given the current direction of the 5 year note back towards the trend line, this could create some pressure on the price of the stock going forward, it the trend continues. I am still confused by the fact that the treasury curve is rallying while the casino names are seeing strong business from the middle and upper class segments of the economy (but that is a story for another day). The 13 week bill remains stable which allows me to remain positive on the outlook for MGM. If both the bill and the 5 year were moving lower aggressively, the story would be different from this end.
mgm hotel
Technicals
MGM is pushing up against the top of its previous range. It is also slowing down up here which is somewhat of a concern. Selling pressure is unwinding but buying pressure is stuck which is troublesome given the current positioning of the stock at the top of the range. If buying pressure were rising at this point, it would argue for a break through the top of the range. Currently that is not the case.

In terms of the power model from the weekly chart, it is exploding higher and threatening to take out the previous high. If this continues, the top of the range should be broken. Given these factors, short term models could break this stock through the top of its range on the long term chart raising the level of buying pressure and setting up a test of the $52 level. Overall, this picture remains bullish.

Sentiment

Analyst opinion heading into this report was slanted slightly to the upside as a firm initiated coverage with a buy in late October. The overall rating is 2.3 on average, which is not extreme and argues for additional upside. Short interest is still elevated at 6.18% so there could be some oomph (like this mornings rise) to the upside in the price of the stock. I think sentiment at this point is helpful and bullish.

Summary

I remain bullish and long on MGM. Given the conservative outlook for the quarter by the management, I think there will be upside to their forecasts. The response by the analyst community will be interesting tomorrow as to whether they keep their estimates firm for the quarter or they trim them. Also, the movement of the 5 year note over the next month or two could go a long way to determining how this stock trades and performs in 2007.

MGM 1-yr chart:

Source: MGM Delivers Earnings In Spades