Mandalay Climbs on Strong Quarter

Robust Las Vegas operations drive results.
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Updated from 9:51 a.m. EDT

Mandalay Resort Group

(MBG)

shares rose 6.2% after the company announced a blow-out first quarter after the bell Thursday, prompting Wall Street to boost earnings estimates and tell investors that shares still appear cheap.

Mandalay reported first quarter net earnings of $87.3 million, or $1.30 a share, which is nearly double the $44 million, or 69 cents a share, it had a year ago. Excluding a pair of offsetting accounting items, the company still earned $1.30 a share, which beat the $1.12 a share expected by analysts, who boosted estimates in response to the outperformance.

Morgan Stanley, Citigroup Smith Barney, Wells Fargo, J.P. Morgan and a number of other brokerages all raised their earnings estimates and said the company's strong Las Vegas performance was set to continue. And while Mandalay shares have nearly doubled over the last year, with estimates on the rise, analysts say the popular stock is becoming a cheap stock.

"The irony is the stock is still inexpensive," said Jeremy Cogan, analyst at Banc of America Securities, in a research note. "At 10 times forward cash flow per share, we think it looks like investors are assuming the company won't grow much ... and/or the stock's had a big run and in a range-bound market, one can wait."

Investors heeded the call and opted to act, sending Mandalay shares up $3.38 to $58 in Friday's session.

Revenue generation is a big part of the Mandalay story. And in the first-quarter, revenue rose 18.3% to $729.4 million from $616.5 million a year ago -- better than the $703.5 million expected by analysts. The company's Las Vegas Strip properties, which include Mandalay Bay, Luxor, Circus Circus and Excalibur casinos, as well as a 50% stake in the Monte Carlo, were especially strong, with revenue up 18% year-over-year and revenue per available room, or revpar, up 25%.

And the company's efforts to expand in Las Vegas also reaped benefits, especially at its flagship Mandalay Bay property, which opened THEhotel, a 1,117-suite hotel tower, in December 2003. Thanks in part to higher room rates at THEhotel, revpar at Mandalay Bay was up 16% year-over-year, with occupancy at 89% for the quarter.

"As promised, THEhotel is delivering high returns, capitalizing on Mandalay's expanded convention presence as well as the overall strength of the destination resort market in Las Vegas," said Glenn Schaeffer, company CFO. "Our other Las Vegas properties have likewise performed on a dramatic course."

With Mandalay firing on all cylinders, analysts say the company could add another $10 to its stock price in the next six months, fueled by strong convention business and Las Vegas.

"When we assessed that estimates for Mandalay were too low for calendar 2004 and 2005, we were wrong not by direction, but by degree," said Harry Curtis, analyst at J.P. Morgan, in a note. "All of Mandalay's Las Vegas casinos and most of their non-Las Vegas assets are generating more EBITDA than our enthusiastic estimates. This stock should achieve our six-month $70 price target."