Tuesday, October 5, 2010

A Mirage or an Oasis? (MGM)

Stock: MGM Resorts International/Changed from MGM Mirage (MGM)
Recommended Price to Hold(New Recommendaton, Just Locked in 15% on sale of MGM!): $11.51
Target Price (12 month): $12
Rating: Hold

Notes: August 7, 2010- We have lowered our target price on MGM shares from $12.5 to $12 this highlights the section of the stock report.

MGM Resorts International is the second largest casino and resort operator in the world by revenue. MGM operates 16 resorts and has 4 properties in Nevada, Illinois and Macau China where it owns 50% of the company. MGM's biggest current project is the CityCenter in Las Vegas which it owns 50% of with Dubai World. The CityCenter was built at a cost of 11 billion dollars and has become the largest privately financed development United States history, the original cost was supposed to be 4 billion. This resort is currently open but not fully functional, when fully operational it will have 12,000 employees. MGM operates some of the largest and impressive casinos in Las Vegas including the Bellagio and the Mirage.

MGM has been under financial strain since 2008 this is because they over leveraged themselves leading up to the "crisis of liquidity". MGM has already had to issue over 140 million shares to boost liquidity. Unlike Wynn Resorts which has half of their casinos in Macau China, MGM is highly concentrated in the United States and this can be a problem going forward. Las Vegas is currently unprofitable for all Casino's, including Wynn Resorts and Las Vegas Sand Corp. Owner of Wynn Resorts, Steve Wynn, a legend in Las Vegas Gaming industry has cancelled projects to build casinos in the United States and is more concentrated on China. Las Vegas Sands Corp Chariman Sheldon Adelson stated that LVS could generate 85 percent of its overall cashflow from Asian markets once the $5.5 billion Marina Bay Sands in Singapore is fully operational.

In order to improve their financial situation MGM is considering an IPO of its MGM Macau property and selling its stake in Bogarta which we expect will net 400 million and 350 million respectively.

An estimate of the Income statement for the 2nd half of 2010 has been prepared

We estimate that MGM will lose 44 cents a share during the 2nd half of the year. MGM announced following Q1 that there will be a 750 million issuance in convertible debt. MGM does not have any long term debt due in the current year which we view as positive. They are also able to borrow another 1.72 billion in their senior credit facility. If there financial situation becomes worse they have a back pocket maneuver of issuing more shares or conducting asset sales. We look for MGM's share price to move higher as the economy improves.

Target Price - Under a worst case scenario tangible equity after 2 more years of losses will be at 2 billion. In our target price we also assumed MGM will dilute shareholders by approximately 77 million when its convertible debt issue from Q1 is converted.

The target price is $12

Previous Notes: Notes: August 3, 2010- We have downgraded shares of MGM from Strong Buy to hold following disappointing Q2 results. The stock price is currently up on the day and we recommend locking in your gains. We originally recommended to buy at $9.97 on July 8, we now say to hold at $11.51

Rating System based on 10 ratings:
1) All You Can Eat Special
2) Screaming Buy
3) Conviction Buy
4) Strong Buy
5) Buy
6) Hold
7) Sell
8) Strong Sell
9) Conviction Sell
10) Abandon Ship
Posted by Allan Edwards

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