The oversupply in Las Vegas claimed another victim Friday, as
said its earnings for the first quarter of 1998 wouldn't meet analysts' expectations.
Confirming publicly what it quietly warned some casino analysts earlier this week, MGM Grand announced it would earn 25 cents to 35 cents per share in the quarter ending March 31. Analysts expected the company to make 51 cents, according to
. (As of last week, the average estimate was 56 cents, but some analysts lowered their forecasts this week.)
In its announcement, MGM blamed bad luck at the tables for its problems. Gamblers, especially the high-end baccarat players known as "whales," won more than expected, causing "an approximate $0.15 per share shortfall compared to historical averages," the company said.
But even bad luck at the tables can't explain all of MGM's woes, analysts said. The news led
Salomon Smith Barney
analyst Bruce Turner to downgrade MGM from outperform to hold and cut his 1998 estimate for the company from $2.35 to $2.00 per share.
"We are concerned with the magnitude of the shortfall and the added risk that we believe investors will ascribe to the stock in the near term," Turner wrote. "We had expected that MGM Grand would be more insulated from changing market conditions than now appears likely.... We now expect that this downside surprise will undermine investor confidence for most of the year."
Merrill Lynch analyst Naomi Talish, who lowered her first-quarter estimate from 55 cents to 45 cents several days ago after talking with MGM management, says the amount of the shortfall surprised her. In addition to MGM's problems at the tables, Talish says cash flow at
New York-New York
, a 2000-room hotel-casino co-owned by MGM and
, has slipped badly.
New York-New York, which opened in January 1997, posted cash flow -- or earnings before interest, taxes, depreciation and amortization -- of $35 million in the first quarter of 1997. The property will produce around $25 million in cash flow in the same period this year, Talish says.
"The must-see factor has worn off, I guess," she says.
After initially falling more than 7%, MGM Grand rebounded slightly in midday trading Friday. At 1:30 p.m., the stock was off 1 3/8, or 3.7%, at 35 13/16. Primadonna, which has counted on the strength of New York-New York to smooth over problems at its other casinos, fell 1 1/16, or 6.7%, to 14 7/8.
warned investors that MGM might face problems in October, when its stock traded at
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MGM's announcement and the lower-than-expected earnings
earlier this week underscore the depth of the casino industry's problems in Las Vegas. But a little-noticed decision by
Detroit Mayor Dennis Archer
last week may offer MGM Grand and Circus Circus at least a slight long-term boost.
In November, Archer awarded two of the city's hotly contested casino licenses to MGM and a group 45%-owned by Circus. The third went to a private group.
Now, in a move that's been largely unreported outside Detroit, Archer has moved the planned site for the Circus and MGM casinos from the city's desolate central business district to a much more favorable location just off the Detroit River. And the group developing the third casino, which was expected to be separate from the other two, says it will now join Circus and MGM.
While Detroit isn't exactly paradise, the relocated casino district is widely considered the prime location for new development in the city. It sits near the Renaissance Center, the office complex where
is relocating its world headquarters, and it has excellent freeway access. In addition, having all three casinos together is a plus, as tourists will be able to safely walk among them.
The advantages of the new district should increase the possible size of Detroit's annual casino market from roughly $1.3 billion to closer to $1.7 billion after the new casinos open around 2000, analysts say. And that's good news for both Circus and MGM, which will depend heavily on their oligopoly in Detroit to boost profits as the
Las Vegas Strip
becomes even more competitive.
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Rio Hotel & Casino
will soon be taken over continue to flare, and the company isn't exactly going out of its way to shoot them down. Rio president James "Jay" Barrett says he can't confirm or deny whether Rio's in talks, but that "things are moving along." Whatever that means.