MGM shares rallied as company said Las Vegas weakness of May-June looks temporary

08/08/2012 6:25 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

I’d say shares of MGM Resorts International (MGM) climbed on August 7 not on its second quarter earnings announced that morning before the market open in New York, but on the company’s conference call. (MGM is a member of my Jubak's Picks portfolio http://jubakpicks.com/ 

In the call MGM told investors that the weakness the company saw in its Las Vegas business in May and June looks like just a pocket of weakness rather than the beginning of a downward trend. The company had already seen business improve in July. Bookings for future stays and for conventions had picked back up too after a soft May-June with convention space about 50% booked for 2013. (It’s something of a headwind for the stock that the company’s convention business set a record in the third quarter of 2011.)

For the quarter MGM Resorts reported a loss of 12 cents a share (after non-recurring items) against a consensus Wall Street estimate of a 14 cents a share loss. Revenue climbed 28.7% from the second quarter of 2011 to $2.32 billion. The Wall Street estimate was $2.35 billion. Most of the increase in revenue (and the 33% increase in EBITDA (earnings before interest, taxes, depreciation and amortization)) came from a change in accounting so that results from MGM China are now included in the company’s consolidated reporting.

The quarter represented something of a stall in the recovery of the company’s Las Vegas business. (MGM operates about 30% of the rooms on the Las Vegas strip.) The company’s U.S. casino revenue fell by 1% after climbing by 5.2% in the first quarter. Room revenue for the company’s U.S. business climbed by 3% and in Las Vegas REVPAR (revenue per available room) grew by 5%. MGM’s competitors in Las Vegas, such as Las Vegas Sands (LVS) and Wynn (WYNN), reported weak second quarter results as well. MGM should start to benefit in the third quarter from renovations and upgrading at Las Vegas casinos such as the MGM Grand and the Bellagio.

Revenue at MGM China grew by 6%, down significantly from an 18% gain in revenue in the first quarter. The decline was largely a result of VIP gamblers in Macau cutting back on their spending per trip as a result of slower economic growth and greater economic uncertainty in China. But the slowdown was also a result of a loss in market share in Macau as a result of the opening of the Sands Cotai Central in April. MGM itself won’t open its own casino on the booming Cotai strip in Macau for another 36 months, the company estimated in its conference call. But the current upswing in sentiment in China should produce a rebound in Macau’s VIP gaming revenue—if the trend is sustained.

The stock is a play on continued economic growth in the United States and decreased economic uncertainty in China. I remain positive on both trends and I’m keeping my May 2013 target price.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund http://jubakfund.com/ , may or may not now own positions in any stock mentioned in this post. The fund did own shares of MGM Resorts International as of the end of March. For a full list of the stocks in the fund as of the end of March see the fund’s portfolio at http://jubakfund.com/about-the-fund/holdings/

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