Thursday, August 7, 2008

Portfolio Pick No. 4: MGM Mirage

Lesser writers would be unable to resist the temptation for a cutesy pun were they to write about a gaming company.

I'm going to lead instead with a fact I think is far more urgent: The Gambling/Hotel Casino industry is down -37% year-to-date. MGM Mirage, which represents the high end of that space, is off -56.3% in the same period. It's trading at roughly 6.9 times earnings.

It's too cheap to resist. It's pick No. 4 and I think it's good for at least a 100% gain. I'll sell half at $70 but will hold on to the rest. (Jefferies has a $92 price target on these shares.)

Reasons to Buy:

Position. MGM has the most swankalicious casinos -- the Borgata, the Bellagio -- and it spends a ton of money making sure they stay that way. It controls the top half of the Vegas strip, where more than three-quarters of its revenue originates and has destination properties in Mississippi and Michigan. Despite a difficult economy, MGM maintained a 97% occupancy rate in the second quarter, and it did so at a higher average price than its peers, $155 a night. (The company has 49,574 rooms and booked $523 million in room revenue in the 90-day period. Gaming revenue was $773 million.)

Strength. Net gaming revenue was down, though net non-gaming revenues were flat. Given its occupancy rate, the conclusion has to be that consumers came to the hotel, paid good money to stay there and simply ate, drank and saw shows instead of hitting the tables. So as is always the case, the house figured out a way to win, and it doesn't mean you didn't have a good time. The company, for its part, says it expects things to pick up in the fourth quarter, and for what it's worth analysts concur. Even if not, MGM should have about $8 billion in revenue, and it booked $2 billion in the first half of the year.

Fear. People are scared silly because Nevada gaming officials data show a drop in gambling. Take a lesson from Buffett, who says he's fearful when others are greedy and greedy when others are fearful. That's where we are, sports fans. Don't buy into the prevailing anti-Vegas fear. Why? Because the sort of American consumers who enjoy Vegas will go there whenever they can. So gaming is in a little slump. Fine. We all know gaming is tied to the broader economy, and that consumer confidence is low. That's cyclical; it will come back. In the meantime, MGM is performing like the market leader it is, and the stock can be had for half price.

Bears -- such boors -- are quick to point out MGM's troubled multibillion-dollar CityCenter venture with Dubai World. The drop in aggregate gaming scares the hell out of them. And yes, the overall market is down, credit is tight and the consumer is squeezed.

Ain't it great? You just don't find sales like this in bull markets. The bondholders aren't nervous, and neither I am.


Kate said...

Just out of curiosity, how do ethics of social responsibility and of conscience play into your stock-buying decisions?
I know your job is just to pick 'em, but how do you peronally incorporate your values?

Dr. King said...

I just got back from Vegas and the one important fact that you did not mention is that the whole world is not having the same issues as the US. That place is crawling with foreigners. Chinese, European, Australian, and even Mexican since the peso is up so much. The Olympics might slow the big money for a few weeks but Vegas will be crawling with great foreign economy money in the 4th quarter.