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The MGM Mirage - A Raw Value Report



April 07, 2009 – Comments (10) | RELATED TICKERS: MGM , LVS

The Business

It bills itself as one of the world’s leading development companies with significant gaming and resort operations. Company management believes the resorts the company owns, manages, and invests in, are among the world’s finest casino resorts.

The company acts largely as a holding company and its operations are conducted through its wholly-owned subsidiaries.

Company management has a strategy that is based on developing and maintaining competitive advantages by: Developing and maintaining a strong portfolio of resorts; Operating company resorts to ensure excellent customer service and maximize revenue and profit; Executing a sustainable growth strategy; Leveraging the company's brand and management assets.

To me, the flaw in management's strategy is the word "Leveraging".

The Company

It is the MGM Mirage (NYSE: MGM) oganized as the MGM Grand, Inc. in January of 1986, a Delaware corporation.

Financial information contained in this report is based on the company’s latest SEC Form10-K filing for fiscal year ending December 31, 2008, as filed with the SEC on March 17, 2009.

Here's the Deal

I'm not going to go into some long drawn out discussion about how the company earns its money, if you are interested in a deeper understanding of the company, click on the link above and read through the latest SEC 10-K filing.

What I am going to go into is, just like the Las Vegas Sands Corporation (NYSE: LVS) the MGM Mirage is mired in debt, closing fiscal 2008 with a debt load of $13.46 billion dollars. Or to put this in more practical terms, 48.12 per share. Based on a recent close of $4.65, the company's debt is 10.35 times greater than a recent close.

And it gets even better. For every dollar in earnings the company has, before interest, taxes, depreciation, and amortization, the company has $7.49 of debt. Think about what I just said. For every dollar in earnings after the company's direct cost of sales, there is $7.49 of debt.

I know, I've heard the arguments about how the company has all these fixed assets that they are carrying on their books at cost, and on and on. The problem with that is if that's the case, is the company is leveraging (there's that word again) its fixed assets for debt.

And if I'm not mistaken, isn't that how America and the rest of the planet arrived in the financial quagmire we now all find ourselves immersed in?

The company has net fixed assets of $16.289 billion, or $58.22 per share. When I compare the net fixed asset number to debt, I find that company has leverage 83% of its net fixed asset value for debt, meaning if the company received 100 cents on the dollar for its net fixed assets, the company could pay off all of its debt and have about $10 a share left over. Given today's economic climate, that's just to tight for my liking.

I will say one thing about management however, they do understand what is required to generate free cash flow, closing fiscal 2008 with free cash flow of $6.89. But because of all of the debt, not to mention that current liabilities exceeded current assets by about 2 to 1, the company's tangible book is in the red at ($2.70) per share.

I'm not saying that the company doesn't have earnings either, earning $5.43 a share for fiscal 2008. What I'm saying is the company has far too much debt, and when I consider that the company paid an average of 4.53% interest on all of that during fiscal 2008, draining the company of $2.18 per share, I have to wonder what will happen when interest rates start to climb.

Certainly in the business the company is in, being debt free may not be a viable option. But what happens in 2011, or 2012, when hyper inflation starts to kick in because of all of the money the government is pouring into the economy today? Will the company be able to service its debt when interest rates are at 11%, or 13%? What rabbit will management be able to pluck from its collective hat then?

I for one happen to think that such hocus pocus will not produce the proverbial rabbit, but instead what will arise is the smell of carrot effluent.


MGM Mirage1208.pdf

10 Comments – Post Your Own

#1) On April 07, 2009 at 10:01 PM, anchak (99.89) wrote:

Thank God Wax....One of the biggest Value Hound in CAPS picking MGM would have distinctly given me some real cause for concern.

MGM like LVS is a day trader's stock....they will push it to crazy levels in the interim - and then it will one fine day go back to the muck

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#2) On April 07, 2009 at 10:09 PM, Tastylunch (28.52) wrote:

MGM also got a going concern notice form their auditors.. Although I think they juts something so they may have put that off.

Carrot effluent! LOL That one had me and my old man crackin up. :)

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#3) On April 07, 2009 at 10:10 PM, Tastylunch (28.52) wrote:

sorry for the ypose that was meant to read as

MGM also got a going concern notice from their auditors. Although I think they just sold something of considerable value so they may have put that off.

Carrot effluent! LOL That one had me and my old man crackin up. :)


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#4) On April 07, 2009 at 10:11 PM, nau99 (28.17) wrote:

Is that one fine day for the muck today?  Just wondering because both were down 20% today.  If a 20% decline isn't the "muck" what is exactly?

With unemployment rates still rising (we'll hit 9% this summer and have a good shot at 10% before year-end) and credit card companies continuing to decrease credit lines, the odds of these casinos turning the corner prior to bankruptcy are remote (at best). 

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#5) On April 07, 2009 at 10:12 PM, greenwave3 (< 20) wrote:

Nice analysis. I'm in total agreement - this is not the right environment to be playing games with companies in so much debt.

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#6) On April 07, 2009 at 11:40 PM, ikkyu2 (98.21) wrote:

Well, in theory, high inflation for a high-cash-flow-based business like MGM is a good thing, because their business is dependent on whatever the economy is doing at that time.  If the Vegas convention business is hot because easy free money is sloshing around every corner of the economy, MGM Mirage gets their cut of a much larger pie, and uses it to pay down debt that looks paltry in view of their future cash flows.

If, on the other hand, we're in the middle of a deflationary recession and the Vegas business keeps shrinking as the overall money-supply pie keeps shrinking, MGM will have all this debt hanging over its head.

I note that with so-called 'profits' of 5.43 a share and a long-term debt load of $48 a share, it would only take MGM about 9 years to earn its way out to free and clear.  What's the maturity on MGM's debt?  It's not all that long, but some of it isn't due until the 2020s. 

MGM's properties execute and deliver a great deal of cash flow.  A bet on MGM now is a leveraged bet on the future of the overall economy.  That's why these shares were going for $105 2 years ago at the height of what looked like a long-running boom, and why they're $3 today as it starts to look like reorg-in-bankruptcy time.

When I go to value a company like this, I like to try a discounted free cash flow analysis with some different assumptions about economic growth and its effects on the corporate operations.  What do you think - up for it? 

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#7) On April 08, 2009 at 5:56 AM, wax (< 20) wrote:


I'm always looking for different value scenarios, but one thing you need to know is that while I include it in my worksheets so I can determine a PEG number, I never use "growth" in my valuation methodolgy.


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#8) On April 08, 2009 at 5:59 AM, wax (< 20) wrote:


I noticed last week that LVS had fairly good move and then I read somewhere that the company was a great investment and on and on. So I thought...let's see.

While LVS and MGM may be great momentum plays, I'm thinking that momentum has left the building for the time being.



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#9) On April 08, 2009 at 6:00 AM, wax (< 20) wrote:


To me a laugh is like a 5 bagger. Thanx.


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#10) On April 08, 2009 at 6:03 AM, wax (< 20) wrote:


While I do like value, it's more about understanding the risks and being well paid for taking those risks. So while value works for me, fear not, MGM and LVS, do not!


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