MGM Has Reached the Buy Zone

05/04/2012 2:39 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Despite taking a beating in the most recent quarter, the major casino-hotel chain should rebound quickly, given that the long-term recovery story for Las Vegas is still very solid, writes MoneyShow’s Jim Jubak, also of Jubak’s Picks.

Before the market open in New York yesterday, MGM Resorts International (MGM) reported a loss of 44 cents a share for the first quarter of 2012. That was much wider than the 15 cent per-share loss projected by Wall Street analysts.

So it’s not especially surprising that the stock fell down 4.65% yesterday. MGM shares are down another 3.8% today as of 11:30 a.m. New York time, on the general decline in US stocks after disappointing April jobs numbers.

On March 20, I wrote a post arguing that you should put MGM Resorts on your watch list, with a buying target of $13.30 or lower. (That post has more details on the company’s improving debt position.)

Well, today the shares are trading at $12.43. That’s well below $13.30. So as of May 4, I’m buying MGM Resorts International for my Jubak’s Picks portfolio.

Why buy a stock after it misses quarterly earnings estimates? Because the wider than expected loss was a result of one-time charges, and the underlying recovery in Las Vegas—the very reason to own this stock—continues on track.

Of that 44 cents a share loss, 35 cents came from things like a loss on retirement of long-term debt (8 cents a share) and provision for income taxes (26 cents a share, versus a benefit in the first quarter of 2011.)

That’s real money, of course, but you’re buying MGM Resorts, if you’re buying it at all, because the company’s Las Vegas properties are rebounding along with Las Vegas as a whole. And that trend was still clearly visible in this quarter’s results.

Revenue for the company as a whole—which includes MGM China—climbed 51%. Excluding MGM China, net revenue increased by 5% from the first quarter of 2011. Total revenue grew to $2.29 billion, versus the $2.26 billion projected by the analyst consensus on Wall Street.

The all-important RevPAR number (revenue per available room) on the Las Vegas strip grew by 4% from the first quarter of 2011—that’s important growth when you own ten casino-hotels in Las Vegas, and you’re the largest company operating in that market.

For the second quarter and for all of 2012, the company told investors to expect RevPAR growth in the mid-single digits, with some possible upside. In the first quarter, the company delivered exactly that upside to its guidance, with 4% Las Vegas Strip RevPAR versus its guidance of 2% to 3%. The Las Vegas convention calendar looks solid, the company said in its conference call, with a strong event calendar.

Investors might have also been disappointed with the company’s lagging position in Macau’s hot Cotai Strip area, especially in comparison to Wynn Resorts (WYNN). That company announced that it had received final approval on Tuesday for its new Cotai Strip development. MGM could only say that a draft land concession—no final approval—for its Cotai Strip property is imminent.

I’d put a $16 12-month target price (May 2013) on MGM Resorts shares. That target calculation includes a premium to shares of smaller casino-hotel operators, but represents a discount to Macau leaders such as Wynn Resorts and Las Vegas Sands (LVS).

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, may or may not now own positions in any stock mentioned in this post. The fund did own shares of Polypore International as of the end of September. For a full list of the stocks in the fund as of the end of September see the fund’s portfolio here.

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