Thursday, July 22, 2004
Copyright © Las Vegas Review-Journal

CASINO EARNINGS: A quarter as hot as summer

MGM Mirage net income rises 95 percent from year-earlier period

Visitors enter the MGM Grand Studio Walk area after exiting the monorail Tuesday. Second-quarter earnings nearly doubled for the property's parent, MGM Mirage. Photo by John Gurzinski.

Gaming giant MGM Mirage reached for the stars in the second quarter, posting its highest earnings margin on investment since MGM Grand merged with Mirage Resorts in 2000, the company announced Wednesday.

MGM Mirage Chairman Terry Lanni, noting that his company's earnings margin was 36 percent compared with 31 percent the year-earlier quarter, said the national and international economic recovery and the strength of the Las Vegas market are driving his company's performance.

Net income for the dominant Strip operator increased to $104.7 million, up 95 percent from $53.8 million in the second quarter of 2003. Earnings per diluted share increased to 74 cents in the second quarter, up 72 percent from 43 cents in the same quarter a year earlier.

Cash flow, a key measure of profitability, increased to $365.5 million, up 26 percent from $291.1 million a year earlier. Total revenue increased to $1.2 billion, up $104.2 million or 10 percent from $1.1 billion in the second quarter of 2003. Cash flow is generally defined as earnings before interest, taxes, depreciation and amortization.

Lanni stressed that the financial gains were broad-based geographically and across all gaming market segments, making his company much more comfortable with the capital expenditures it has under way or planned.

MGM Mirage President Jim Murren said revenue per available room was up 11 percent, slot revenues were up 10 percent, table game revenues were up 8 percent and the hold percentage was identical to a year ago, between 18 percent and 22 percent.

"We were strong not just in the second quarter, but we're seeing the trends continue in the third quarter," he said.

Deutsche Bank analyst Marc Falcone said MGM Mirage should keep benefiting from improved room rate pricing trends as well as capital expansion projects, including the new Bellagio tower set to open next year.

Lanni said that with a strong economic recovery under way, MGM Mirage's customers -- many of whom are entrepreneurs -- not only spend more money when they are here, but also are coming in greater numbers because they have more time for leisure activities as pressures on their businesses subside.

In addition, Murren said the profile of the average MGM Mirage customer is improving, with casino customers having more liquid funds available and showing a willingness to spend more money.

"It was a huge quarter for them, with very large numbers. They went a long way to allay investors' fears that Las Vegas is slowing down," Eric Hausler, gaming analyst for Susquehanna Financial Group, said.

Joe Greff, gaming analyst at Fulcrum Global Partners, an independent Wall Street investment research firm, said there has been substantial uncertainty among major investors recently about the second half of the year for the gaming industry.

"But we heard a very different story today (from MGM Mirage). Their operating leverage on growth is pretty strong and getting stronger," he said.

Greff explained that about two-thirds of the increases in MGM Mirage's operating revenues are passing directly through to cash flow, which he called "remarkable."

Lanni said his company's pending purchase of Mandalay Resort Group will stretch its reach across more market segments and should increase its earnings and its margins further when the deal closes next year.

MGM Mirage in June reached agreement to buy Mandalay Resort Group for $6.4 billion in what was the largest casino deal ever until Harrah's Entertainment struck its $9.4 billion deal to buy Caesars Entertainment last week.

Greff said the Mandalay acquisition makes sense for MGM both financially and strategically because the companies serve complementary business segments. The merger also will hedge against any potential negative impact from Wynn Las Vegas when it opens in April while adding to MGM's free cash flow, he said.

Given the company's solid operating performance, Greff said MGM Mirage shares "should not have to toil in 'deal purgatory,' and analysts generally rated shares a "buy."

MGM Mirage closed Wednesday at $43.08, up 75 cents or 1.77 percent on 1.7 million shares, 70 percent above normal trading volume.