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Yinan Zhu

MGM AT A GLANCE

P/E ► -2.12   EV/EBITDA ► 4.39 AVG ROA ► -1% AVG ROE ► -18.9% AVG Debt to Equity ► 4.83 HIGH Current Ratio ► 0.131 VERY LOW Interest Coverage Ratio ► -0.0757 AVG

 

 

 

 

 

 

Revenue, Net Income, and Net MarginRevenue, Gross Profit, and Gross MarginOperating IncomeEbitIncome Before TaxesNet Income from Continuing OpsInterest vs Continuing IncomeInterest CoverageOperating ExpensesSG&AAmortization & Depreciation

MGM Mirage (NYSE:MGM) runs hotels and casinos throughout the world, most notably in Las Vegas and burgeoning Macau. The company generates slightly less than half of its operating income from casino activities with lodging, dining, entertainment and retail services comprising most of the rest. MGM also hosts major conventions and operates gambling facilities for third parties.

MGM is well-established in Las Vegas, where it owns half of all the gambling mecca's rooms and approximately 39% of its gaming facilities.^[1] But the company's prospects for growth may be most closely tied to Macau, which the fastest growing gaming market in the world. (See "Trends and Forces") MGM, through MGM Grand Paradise Limited, owns 50% of MGM Grand Macau, a large, multi-purpose casino and resort which began operations in December, 2007.^[2] The other 50% stake is held by Pansy Ho, the daughter of Stanley Ho, who owns an additional 8 hotels in Macau and has been nicknamed "The King of Gambling".

MGM Mirage is not affiliated with MGM studios, a privately-held movie studio whose owners include Sony (SNE) and Comcast (CMCSA).

[edit] Business Financials

The majority of MGM’s income comes from Las Vegas, where it owns major hotels totaling 50% of the city’s hotel rooms and about 39% of all gambling facilities^[3]. In addition, MGM owns domestic operations in Nevada, Michigan, Mississippi, New Jersey, and Illinois, as well as international properties and operations primarily in Macau.

MGM’s revenue and operating income has grown at a steady progression in the past three years. However, due to current large-scale projects that require a lot of upfront capital, the company retains $13 billion of debt. It is also interesting to note that unlike many of its competitors, MGM’s breakdown of revenue is well diversified.

[edit] Key Trends and Forces

• Tourism in Las Vegas: MGM depends on the sustained growth of tourism in Las Vegas and, increasingly, Macau. With 72% of the company's ^[4] guestrooms already located in the city, and its CityCenter project scheduled to open by the end of 2009, MGM is betting on the historic growth of tourism in Las Vegas of about 5% a year.^[5] A disruption in this trend may lower hotel and casino occupancy, and decrease future revenues.

• Airline Travel: The majority of MGM’s customers travel by air. Therefore, MGM’s future profitability and success is contingent on the overall health of air travel. As an example, MGM saw a precipitous drop in the number of customers after the terrorist attacks of September 11, 2001. The company did not see a recovery to pre-9/11 for the next 9 to 18 months.

• Extending into the Housing Market : MGM’s current project, Citycenter, involves the selling of 2,700 condominiums, which will contribute $2.5 billion dollars to the project cost of $7 billion^[6]. The success of this operation is partly contingent on the overall health of the US housing market. Although MGM is currently reporting healthy progress ^[7]

• Rising Interest Rates Make Debt Expensive: Given the large amount of capital required to build its massive hotels and casinos, MGM accrued $13 billion in debt as of FY 2006. As a result, the company is exposed to rising interest rates, which could make borrowing money prohibitively expensive and stunt expansion. About 44% of its total borrowings are in the form of long-term variable rate debt ^[8].

• Macau May be the Next Great Frontier : Macau is the fastest growing gaming market in the world, with gaming revenue compounding at 23% annually since 2001. The burgeoning Chinese economy, which is close in proximity, is sending large contingents of increasingly wealthy tourists to the gambling region. While MGM is one of only 6 companies licensed to operate in Macau, the company is subject to the local foreign regulatory framework and potential political or economic instability in the area. ^[9]Furthermore, Chinese travel policy may significantly affect the number of customers to its hotels and casinos.

• 56% ownership by Tracinda Corporation Kirk Kerkorian, through Tracinda Corporation, owns approximately 56% of MGM's outstanding common stocks. As a result, the group holds significant control over the company, and can, for example, elect MGM's entire Board of Directors.^[10] However, this majority stake may be beneficial because Tracinda, a large investment firm, can provide MGM with extra backing in the case of financial instability.^[11]

[edit] Competition

[edit] Las Vegas

MGM’s primary competitors are situated in Las Vegas. While these companies have similar operations, MGM’s primary distinction is that its revenue breakdown is more diverse, and less dependent on casino income. It is important to note that MGM dominates in terms of the size of its holdings in Las Vegas, with 9 of the most prominent resorts.

Las Vegas Sands

• The Venetian has 4.027 suites and 120,000 gross square feet of gaming
• The Palazzo is under development and will consist of 3,025 suites and 105,000 sq feet of gaming ^[12]

Harrah's Entertainment owns and operates 72 locations comprising nearly 3 million square feet of casino space as well as over 38,000 hotel rooms and suites across countries such as the U.S. Canada, the U.K., Egypt, and South America. In Las Vegas, the company owns 629,000 square feet of casino space and 20,300 rooms and suites at locations such as Bally’s, Caesar's Palace, Harrah’s, The Flamingo, and Paris. ^[13]

Wynn Resorts owns the hotel “Wynn”, which has 2,716 suites and approximately 111,000 square feet of gaming space. The company will build “Encore”, which is planned to have just over 2,000 rooms and 72,000 square feet of casino space.^[14]

[edit] Macau

In Macau, MGM faces many old competitors, as well as some new ones.

• Las Vegas Sands owns “The Venetian” Macau, which has 3,000 suites (casino square footage is not reported). Several other projects are in development.^[15]
• Wynn Resorts opened the “Wynn Macau” in September 2006 with approximately 110,000 square feet of casino space. A second phase will more than double the gaming space.^[16]
• Melco PBL Entertainment is a locally based casino operator that owns the Crown Macau Hotel Casino, and is currently developing two more large-scale casinos. The Crown Macau caters to the VIP segment of the market with its 216 hotel rooms, over 200 game tables and over 200 slot machines. The City of Dreams is slated to open in March 2009 with 1,666 hotel rooms, 2,500 slot machines and over 400 game tables.

[edit] Notes

1. ↑ 2006 MGM 10-k,Item 7 Pg. 24
2. ↑ "MGM Grand Macau Debuts Stylish New Icon", CNN Money, Dec. 18, 2007
3. ↑ 2006 MGM 10-k,Item 7 Pg. 24
4. ↑ 2006 MGM 10-k,Item 1 Pg. 1
5. ↑ "Historical Economic Data for Metropolitan Las Vegas", Center for Business and Economic Research, University of Nevada, Las Vegas
6. ↑ 2006 MGM 10-k,Item 7 Pg. 30
7. ↑ In Business Interview with MGM COO
8. ↑ 2007 MGM 10-q, Item 2 pg. 24
9. ↑ 2006 MGM 10-k,Item 1 Pg. 14
10. ↑ 2006 MGM 10-k,Item 1 Pg. 14
11. ↑ Discussions on MGM, Paul Simenauer
12. ↑ Las Vegas Sands Corp. 10-K Filing for FY 2006, Management's Discussion and Analysis of Financial Condition and Results of Operations, p. 45
13. ↑ Harrah's Entertainment Inc. 10-K Filing for FY 2006, Properties, p. 14-15
14. ↑ Wynn Resorts Limited 10-K Filing for FY 2006, Business, p. 2
15. ↑ Las Vegas Sands Corp. 10-K Filing for FY 2006, Management's Discussion and Analysis of Financial Condition and Results of Operations, p. 46-47
16. ↑ Wynn Resorts Limited 10-K Filing for FY 2006, Business, p. 2