Monday, December 24, 2012

MGM Mirage (NYSE: MGM): An Excellent Long-Term Opportunity

MGM Resorts International (NYSE: MGM), the biggest casino owner on the Las Vegas Strip, operates a peerless portfolio of destination resort brands, including Bellagio, MGM Grand, Mandalay Bay and The Mirage with a market cap of $5.78 billion. The Company has significant holdings in gaming, hospitality and entertainment, owns and operates 15 properties located in Nevada, Mississippi and Michigan, and has 50% investments in three other properties in Nevada and Illinois. In addition to its 51% interest in MGM China Holdings, Limited, which owns the MGM Macau resort and casino and is in the process of developing a gaming resort in Cotai, Macau.

MGM continues to benefit from resurgence in gambling in Asia and in Las Vegas. Positive data in the US, including improved optimism in the gambling hotbed of Nevada, has sent stocks for casino companies with larger America presences up. Gambling revenue in Nevada rose 1.9% to $978.8 million in October, the state's Gaming Control Board reported Friday. On the Las Vegas Strip, which accounts for more than half the total, the take was up 3.6% to $580.7 million. Similarly, Macau Gaming Inspection and Coordination Bureau reported on December 3 that gambling revenue in November grew 8 percent to $3.5 billion, the highest single-month revenue figure ever recorded.

Macau is the only place in China where people can legally gamble at casinos. Though the VIP segment, which traditionally accounts for 70% of Macau’s gaming revenue has suffered in terms of growth, the mass market has remained strong as emerging Chinese middle class have continued to flock across the border into the southern Chinese enclave.

MGM China had a record third quarter with EBITDA growth of 5% year-over-year before branding fees, and CityCenter continues to show progress as well with record third quarter EBITDA from resort operations of $59 million, up 18% year-over-year. At ARIA, third quarter EBITDA was $47 million, a 17% increase over 2011. This was also the highest third quarter EBITDA since opening. Total casino revenue exceeded last year with net table games revenue up 4% and net slot revenue up 3%. ARIA benefited from a favorable table games hold impact of $8 million year-over-year, with gross table games hold percentage of 29.3 versus 25.5 last year.

During a conference call in October, Chief Executive Jim Murren said that qarly fourth-quarter trends were improving at it domestic resorts and forward convention booking pace is showing growth in 2013 and is further accelerating into 2014.

The company is ideally positioned to take advantage of both domestic and international opportunities, and is executing well on its business strategy. MGM has been working on a handful of key strategic development and expansion opportunities, including Cotai, Maryland, Massachusetts and Toronto. The company's Cotai project will have up to 500 tables, 2,500 slots, 1,600 rooms and a budget of approximately $2.5 billion to be spent over a timeframe of 30 to 36 months. 

The firm has taken several steps to improve its financial position. The transaction will significantly reduce MGM’s interest expense burden by trimming high-coupon debt and improve its ability to generate cash. MGM Resorts, which has more than $13 billion in long-term debt, recently entered into a $4 billion amended credit agreement, issued $1.25 billion in new debt and retired older debt. The company has raised more than $8 billion in long-term financing during 2012. MGM anticipates saving approximately $230 million annually in reduced interest expense from this refinancing, which will allowing it to improve free cash flow and further enhance it balance sheet.

Full Disclosure: None.
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