Company Review – MGM Mirage

Company Profile: MGM MIRAGE (MGM):

MGM MIRAGE is a gaming company, which through its wholly owned subsidiaries owns and operates casino resorts, which includes gaming, hotel, dining, entertainment, retail and other resort amenities. The Company owns and operates casino resorts in Las Vegas, Nevada. The Company owns three resorts in Primm, Nevada, as well as two championship golf courses located near the resorts. The Company also owns and operates two resorts in Mississippi. During the year ended December 31, 2005, MGM Mirage’s operations consisted of 24 wholly owned casino resorts and 50% investments in three other casino resorts. On April 25, 2005, MGM MIRAGE closed its merger with Mandalay Resort Group (Mandalay) under, which it acquired Mandalay.

Business and Management Review

1) Is the business simple and understandable?

The gaming industry bases their business on the entertainment of their customers while visiting their establishments. Customers gamble their money and the casino pays out periodically, but the risk of loss on the casinos’ end is minute. There is constantly a steady cash flow entering the company as the casinos are open twenty-four hours a day, three hundred sixty five days a year.

2) Does the business have a consistent operating history?

Gaming has a long and at times troubling history as the culture in the United States has changed its perception of this industry. Currently, it has turned into a corporate powerhouse with huge profits and even larger assets in terms of buildings and land. With Las Vegas, NV being the Mecca of gambling, MGM Mirage is in a position to prosper with the amount of casinos they own and operate.  

3) Does the business have favorable long term prospects?

With continued growth in Las Vegas, as well international gambling sites (particularly Dubai) there will be competition. We feel that traditional brick and mortar gambling’s best days may be behind them as online gambling will grab more market share even with current legislation in this country to curb the usage. However, we do not expect gambling to decrease in size, but rather that the explosive growth MGM enjoyed in the 1990’s will be difficult to replicate, at least here in the United States. There may be opportunities abroad, but there would be needed infrastructure for this to take place.   

4) Is management rationale?

We worry that management may be acting out of order in the amount of debt they are piling on the company. This is unless they have explicit plans to use this financing to expand internationally, otherwise they are misallocating resources. The fact they pay no dividend is another reason we are concerned of the priorities of management.

5) Is management candid with its shareholders?

MGM Mirage has an extensive investor relations page and we are pleased with the amount and quality of information provided.

6) Does management resist the institutional imperative?

We worry that the CEO is also the chairman of the board and would like to see the two positions be separate individuals. That issue mixed in with the overall capital structure of the company makes us worry where management is in terms of outlook and long term forecasts.

Financial and Value Review

Defensive:
1) Size of firm

At $16 billion (USD) market capitalization, MGM passes the test of being less than $2 billion in market size.

2) Strong financial condition

At 0.66 MGM fails the test of having a current ratio of above 2. Looking at the reasons why this ratio is so low, it is evident that the debt/equity ratio is roughly 3.6. This explains the high liability portion in the current ratio and may be troublesome as to the amount of debt the company currently holds.

3) Earnings stability

MGM has had positive net income for the past ten years, therefore, passing this test for the defensive investor.

4) Dividend record

The company does not pay a dividend and fails this test. It is again worrying that there is not sufficient capital to pay a dividend leading us to again infer that the level of interest payments on their debt obligations are stripping this company of liquidity.

5) Price to earnings analysis

The P/E ratio for MGM is over 29 and fails the test of being below 20.

6) Price to assets analysis

The P/B ratio is over 4.5 and significantly fails the test of being below 2.5. Between this and the P/E ratio we have to begin to question current pricing on the open market.

Conclusion:

MGM Mirage fails the defensive investor test and we would not recommend placing this security in such a portfolio.

Enterprising:
1) Strong financial condition

With a current ratio 0.66 the company fails this test of being below 1.5.

2) Earnings stability

The company has had positive net income for the five years prior and passes this test for the enterprising investor.

3) Dividend record

MGM pays no divided and fails this test.

4) Earnings growth

Earnings are greater than five years ago and as such the company passes this test.

Conclusion:

MGM Mirage fails the test for the enterprising investor and would not fit the investing criteria of this type of investor.

Valuation:
Based upon our internal valuation we place a fair price of $24 a share on MGM Mirage which currently places this stock significantly overpriced as the closing share price (12/20/06) was $55.31.
Opinion:
Given the factors explained above, we are not favorable of MGM Mirage and feel that it does not suit our investing philosophy. We are not against the gaming industry, but feel that this company is not in line with the Benjamin Graham or Warren Buffett school of investing.

Neither of us held a position in MGM at the time of publication.  Also, please read our disclaimer and Our Methods.

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