Stock of the Day - January 12, 2009

MGM Mirage

If you know me personally you know that I’m obsessed with playing poker and hitting casinos. There is hardly anything good to say about MGM Mirage (MGM), and this is why it hurts me so much to write an article about the ailing company. I’ve compiled a list of all the negative factors that have and will be affecting the company. I’m going to try to get this all out at once to take away the sting, and then I’ll break each factor down.

1)    The plunge in stock price

2)    General macroeconomic downturn

3)    Poor timing of the CitiCenter project

4)    Declining quarterly income

5)    Entrance of a new CEO, James Murren

That’s it for the basic summary, now for the grim analysis:

1)    Looking at the one-year graph of MGM’s stock price is like looking at a cliff. The stock had a high of $75.08 and a low of $8.00 and is currently trading at $12.40. The significance of this drop would be hard to understate. Anytime a stock price gets crushed that hard, there is usually a good reason for the free fall, and it is just a matter of finding out what is wrong.

2)    Las Vegas as a whole has taken a huge hit as a result of the credit crisis and general macroeconomic downturn that our country is seeing. Nevada has seen a 14.8% drop in gaming revenue and the Las Vegas Strip has seen a 16.1% fall in revenue. A drop in revenue from the Strip equates to a fall for MGM (MGM currently owns and runs 10 casinos on the Strip). In a time when people are concerned about whether or not they will have a home in upcoming months, most consumers won’t be inclined to gamble. It’s simply a choice between sustenance and entertainment. The economic slump has helped MGM in a small way: lower gas prices may encourage weekend warriors to make the trip to Vegas, but that is where the advantages of a poor economy end for the ailing casinos.

3)    A year ago, the sickening tone of this article would have been incredibly surprising. This is because Gaming and Vegas spending were at all time highs. Companies like MGM and Las Vegas Sands Corp (LVS) were steadily rising in price and the vast majority of investors didn’t see a sharp decline coming. MGM capitalized on the good times by building CitiCenter, a $9.2 billion complex of high-end resort-casinos, residences, and retail centers. The place actually looks incredible (check it out at citycenter.com), and it is supposed to open in 2009. In an incredibly cruel turn of fate, the economy turned bearish at the peak of CitiCenter’s hype. MGM was dealt a severe blow by unlucky timing. Recent news about CitiCenter has shown us just how brutal the economy has treated the company. Last week, MGM announced that they will be postponing the opening of one of their luxury hotels and canceling a luxury condominium completely. MGM is making the cuts in an effort to save $800 million. The fact that they’re doing this despite having already invested a lot of money in capital for CitiCenter shows just how dire the situation is.

4)    If you take a look at MGM’s income statement you’ll see that the company is following an incredibly poor trend. The company lost nearly half of its Income between the 2^nd and 3^rd quarters of 2008 (going from $113,101,000 to $62,278,000). There is no doubt that the company’s revenue and income will be even worse for the 4^th quarter of 2008.

5)    Finally, the kicker. MGM made the transition from its old CEO to new COO, James Murren, in December. I’m not saying that Murren will be bad for the company; In fact, he could completely turn MGM around. But it’s very hard to judge how good, or bad, a new leader will be for a company in a short amount of time. I prefer to wait and see how a new CEO acts before buying stock in a company. Also, the fact that MGM’s old CEO, Terry Lanni, had reason to leave gives me significant doubts about the company.

If you’re thinking about buying stock in MGM Mirage, the odds are stacked against you. And I’m not talking about a 51% to 49% split in Blackjack… your risk of losing is much more significant. Granted, the company is founded on a solid base and I believe that Las Vegas will be around forever, so I don’t think they’re headed towards bankruptcy. MGM will have the resiliency to survive in the long run and I’m sure that they will even thrive when the economy turns around. But the fact is the company will not be looking good and casino stock prices will continue to plunge until we get out of the recession, and nobody knows when that will be.

-Matt Schwartz

College Trillionaire