Vegas Watchers Fight for Edge

Analysts offer varying views after MGM Mirage's profit report.
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Even in the wake of a strong second quarter and upbeat forecast at

MGM Mirage

(MGM) - Get Report

, not all Wall Street stock pickers are betting on the house.

One analyst -- Merrill Lynch's David Anders -- slashed the casino operator's shares to sell on Friday, triggering a decline that shaved as much as 2.7% from their value even as other analysts were raising price targets.

The differing calls on the stock come after it soared to a 52-week high of $46.77 in the wake of the earnings announcement. They also come after some investors have grown jittery that the company's valuation, and those of other casino operators, leave little margin for error if Las Vegas's recent roll encounters even a little bad luck.

The latest quarter's results were MGM Mirage's first since completing the acquisition of former rival

Mandalay Resort Group

.

Anders, whose firm does and seeks to do business with companies covered in its research reports, still likes MGM Mirage's management team and believes the company has a "remarkable" set of growth opportunities. But he contends the stock's valuation has gotten too rich, with an enterprise value-to-EBITDA (earnings before interest, taxes, amortization and depreciation) multiple of 10.4 times 2006 estimates -- ahead of the 10-year average of 8.6.

"We have a hard time accepting that the growth and return characteristics of Las Vegas assets have changed meaningfully enough to warrant the revaluation awarded to MGM Mirage," Anders wrote in a research note explaining his downgrade. "The bottom line is that Las Vegas casinos still operate generally in a real estate-oriented industry."

Supply and Synergy

The growth of new casinos, hotel rooms and gaming devices in Las Vegas generally has been weak in the last three years and has been outpaced by demand, Anders argued. That combination has led to juicy profits at existing casinos. However, things are likely to change as new-supply growth picks up in 2007. New supply will force owners of existing properties to plow cash into renovations in order to compete with the new properties, reducing profits.

Anders expressed worry about other issues. For one, MGM Mirage's recent string of blowout earnings reports, in which it beat Wall Street's estimates by a wide margin, may be behind it. In the latest quarter, MGM Mirage only beat the consensus by 2 cents. "We believe that after six quarters, analysts may finally be getting the numbers right, which could remove a catalyst for appreciation in the future," he wrote.

At the same time, another positive driver for stocks -- future growth plans -- are already known in the case of MGM Mirage. With such big projects as the Las Vegas City Center on its plate, the company is unlikely to surprise investors with another big project anytime soon, according to Anders.

But other analysts came away from MGM Mirage's latest quarter with much rosier views of where the stock is headed, and some even raised their price targets.

Among them is J.P. Morgan's Harry Curtis, who found enough positive surprises to lift his earnings estimates and increase his 12-month price target to $55 from $50. His firm does and seeks to do business with companies covered in its research reports.

Curtis now expects stronger unit revenue growth at MGM Mirage's Las Vegas hotels, after the company's executives said they're expecting robust convention business next year. In a conference call, they said 2006 group bookings for the MGM Grand for 2006 are 26% ahead of where group bookings were a year ago. At the Mandalay Bay resort, the pace of 2006 bookings is up 39% year over year.

The analyst also improved his forecast for future baccarat revenue to a possible increase from his previous forecast for a 10% to 15% decline. In the earnings conference call, MGM Mirage executives issued a bullish outlook for the game, a favorite of high rollers. And while MGM Mirage executives have predicted initial merger-related benefits of $100 million a year from the Mandalay deal, Curtis says they're likely to increase to at least $200 million in 12 months.

"The $100 million synergy estimate represents, in our view, just the tip of the iceberg," he writes. "These are savings that have been identified and will be executed within several months. There are other savings and revenue enhancements which will phase in over 2006 and 2007 such as purchasing."

More Wagers

While Anders' long-term view is that coming supply growth will dampen casino profit growth, other analysts have taken a positive of view of one recent addition to high-end casino supply -- the late April opening of

Wynn Resorts'

(WYNN) - Get Report

palatial Las Vegas resort.

Marc Falcone, an analyst at Deutsche Bank, says Wynn is actually growing the market and has yet to hurt business at MGM Mirage's competing luxury properties. In a research note, he points out that money wagered on table games increased 17% at the company's Bellagio casino in the second quarter, even with the Wynn resort open down the street during all of May and June.

Falcone also contends that the quarter's results and the company's upbeat guidance should assuage investor concerns about a Las Vegas slowdown. The analyst, whose firm does and seeks to do business with companies covered in its research reports, reiterated a $52 price target and a buy rating on the stock. The stock could go even higher, he writes, because his price target doesn't include additional MGM Mirage projects in Macao or Singapore.

Even bulls like Falcone acknowledge that MGM shares have been trading at pricey levels. But they contend there are still enough potential earnings surprises to drive the stock higher.