Buying MGM After The Earnings Miss

Nov. 5.12 | About: MGM Resorts (MGM)

MGM Resorts International (NYSE:MGM) reported 3rd quarter results last Wednesday, October 31st with loses increasing to 37 cents per share compared with 25 cents per share last year (23 cents this year versus 14 cents last year on an adjusted basis). EPS missed estimates by 6 cents prompting cuts to analysts' estimates for full 2012 and 2013 earnings. Revenue of $2.25 billion missed estimates but did benefit from a 7% increase in Macau revenue. REVPAR at the company's Las Vegas strip properties fell 2%, driven by occupancy in the quarter of 92% versus 95% for a same period a year earlier. At wholly owned domestic resorts revenue fell 2% despite a 2% gain in casino revenue. The company's efforts for new devolvement in Maryland, Massachusetts, and Toronto have increased corporate expenses and MGM will continue to see the effects of that in Q4.

The company now has all rooms at MGM back online and will be finished with the Bellagio Spa Tower renovations this December. The company believes they are facing a better room rate environment in the 4th quarter versus the 3rd quarter. They also said bookings for conventions for 2013 are outpacing bookings for 2012 and they feel very good about bookings for 2014. The new show at Aria, Zarkana, will start this week, and I believe it will provide a tenuous boost to the property. A successful show can bring in tens of millions of dollars, compared with the Elvis show that was losing money.

The company continues to point to lowering borrowing costs as a future driver of improving results. While saving in borrowing costs are helpful I believe the company needs a lower level of leverage along with stronger operating results for most investors to believe in this company's future. New developments in North America should help MGM, however it will be sometime before these developments come online and I believe their significance will be minimal to the company. Furthermore new development in Macau should benefit MGM along with strength at the existing MGM Grand Macau property.

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Since MGM's most recent lows below $9 per share in early August MGM has seen what I think is a weak uptrend. I believe levels around $12 have been a place of some upside resistance for this stock. Conversely, $9 per share has been a level of very strong support for this stock and moves below $9 per share have presented strong buying opportunities. Near $10 per share this stock has a strong risk to reward profile. I would watch the current uptrend and if it continues to hold, I would consider a half position at the current level and look to fill out the position at $9 per share.

Data sourced from: Company filings, and Yahoo!Finance. Chart from:

Disclosure: I am long MGM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.