The MGM Mirage - A Raw Value Report
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".
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.
Wax MGM Mirage1208.pdf