Warring Ideas on MGM

Sell-side analysts place divergent bets on the casino owner.
Publish date:

Shares of big casino operators like

MGM Mirage

(MGM) - Get Report

have been on a roll this year, boosted by strong Las Vegas business.

But one Wall Street analyst who has been bullish on casino stocks is voicing concerns about future trends in Sin City. The analyst, Joseph Greff at Bear Stearns, downgraded shares of MGM Mirage to "peer perform" from "outperform" on Monday. Bear Stearns does and seeks to do business with companies covered in its research reports.

MGM Mirage shares fell 81 cents, or 2.1%, to $38.44 after the downgrade.

In a note explaining his call, Greff says his surveys of future room rates in Las Vegas point to a meaningful deceleration in July and August. Operators appear to be pricing rooms aggressively for the summer, which means rates could fall year-over-year at some casino hotels.

"We are concerned that this could spread to other properties and create a rate war for the summer," Greff writes.

One other sell-side analyst is crying "Hooey," though, and is advising investors to take advantage of any weakness to load up on MGM stock.

"We have a more favorable outlook on July and August than our competitors," writes Harry Curtis at J.P. Morgan. The "blended" rate for all Las Vegas Strip properties is up 9.1% year over year, while rates were up only 3% at this time last year, according to Curtis.

Curtis adds that nine of MGM's 10 important Las Vegas properties are showing rate growth of $10 a room in July, while seven of the 10 are seeing such growth in August. J.P. Morgan does and seeks to do business with companies covered in its research alerts.

But Greff says there's more to worry about than just room rates for the rest of the summer. Looking ahead to 2006, the Bear Stearns analyst says convention volumes on the Strip will likely increase by only "a few percentage points," while volumes for large conventions -- those with more than 5,000 attendees -- could actually decline from 2005.

"This disproportionately impacts the Mandalay properties given

Mandalay's increased dependence on convention volumes to drive midweek revenue and profit growth," Greff writes. MGM Mirage closed its purchase of the Mandalay Resort Group in April, creating what is now the world's second-largest casino company after

Harrah's Entertainment



Greff says another challenge for MGM Mirage is its own stellar performance over the past couple of years, which will make year-over-year comparisons more difficult in the future.

Greff's number-crunching has led him to reduce his EPS estimates for MGM Mirage for the second half of 2005 and all of 2006 below Wall Street's consensus. He has also suspended his $46 year-end price target on the stock.

Still, the analyst's concerns about Las Vegas have yet to prompt him to change his "outperform" ratings on other big casinos stocks like

Wynn Resorts

(WYNN) - Get Report

and Harrah's. Greff contends Wynn has a lower dependence on convention business while its shares factor in low expectations for its Las Vegas margins.

Harrah's still stands to realize lots of efficiencies from its recent acquisition of Caesars, has an attractive valuation and faces "easy" year-over-year comparisons in most of its non-Las Vegas markets, he adds.