Time to Double-Down on MGM Mirage

MGM Mirage (MGM) shares were trading around $54/share on Thursday, April 10, 2008, likely the combined result of a weak U.S. economy and more downgrades by analysts covering the gaming and lodging sector. Understand that this is a stock which is down now around 46% off of its 52 week high of $100/share in October 2007.

In other words, MGM shares peaked at the same exact time the Dow Jones Industrial average and S&P reached their respective all-time highs as well. Since those October highs, the broad indices and MGM’s stock have taken it on the chin, with MGM’s consumer discretionary bent causing the selling to be far worse that of the S&P. True, MGM shares were due for a pullback given the slowing macro environment, less consumer discretionary spending, not to mention the headline negativity and revenue hit due to the fire at the MGM owned Monte Carlo Hotel on the Las Vegas Strip.

However, a closer look reveals that the downside pressure of MGM has created an exceptional buying opportunity in to a great secular growth story. First off, let us examine what kind of business we are dealing with. MGM owns and operates 17 properties located in Nevada, Mississippi and Michigan, and has 50% investments in four other properties in Nevada, New Jersey, Illinois and Macau.

MGM Mirage is developing major casino and non-casino resorts, separately and with partners in Las Vegas, Atlantic City, the People's Republic of China and Abu Dhabi, U.A.E. These properties primarily are focused on hospitality, gaming, and entertainment. Except for the Wynn and Venetian hotels, MGM properties basically dominate the Las Vegas Strip.

MGM shares also trade at a lower valuation than both Wynn Resorts (WYNN) and Las Vegas Sands (LVS) (the Venetian’s parent company).

Clearly, if consumers worldwide are feeling the effects of a deep U.S. led recession, then MGM will see significant decreases in revenue. A 46% decrease in its stock price would seem to price this in. It is often said that in secular bull markets, a 50% correction is possible and in fact winds up being a great buying opportunity. Gambling is categorically a secular bull market, particular in China and other emerging markets. If consumers at home come back to life given all of the fiscal and monetary policy by the federal government, then MGM shares are highly likely to recover in the second part of 2008 and beyond.

Personally, I was living in New Orleans during Hurricane Katrina and its aftermath in 2005. After FEMA distributed hundreds and thousands of dollars to New Orleans area residents, the casinos were packed in the months following the storm, when the city’s residents were allowed back in to the city.

Even though the “right thing” to do would have been to save, invest, pay off debts, I think the response was natural in some respect—after months of dealing with hardship, people had some money to spend and steam to blow off, and what better place to do this than a casino? I expect the same phenomenon to happen this Memorial Day and beyond, when American consumers receive their stimulus package checks from Uncle Sam. I also expect Las Vegas (as hot as it is outside in the summer) to be a more popular destination for Americans as the U.S. dollar currency continues to weakness against out foreign counterparts and traveling domestically rather than internationally is a better option. Further, I expect foreigners to take advantage of our currency weakness and come to Vegas to exploit this imbalance.

Factor in the company’s long term growth with positions in the Macau and Dubai markets, not to mention a growing dominant presence in Atlantic City, and the net result is that MGM shares should be bought aggressively on any further weakness in anticipation of a recovery this year and beyond.

Disclosure: The author is currently long MGM MIRAGE (MGM) shares.

Comments

[Capt Vegas]

The casinos are all hurting. Every day something more is taken away from the customers in gaming, comps, service, pricing. Traffic, revenue all down and the casinos sill can't bear to give a sucker an even break !

[DanielKowkabany]

I've followed Kirkorian and MGM since he bought what is now Ballys and have made money. He owns over 50% of MGM and yes MGM will come back stronger than ever. Ditto for LVS and WYNN and Boyd Gaming.