Stormy Weather at Mandalay Bay

Mandalay Resort Group's ( MBG) dismal fourth quarter -- which it primarily blamed on rain -- has prompted a debate about whether stormy weather lies ahead for other casino companies.

The casino operator reported adjusted earnings for the quarter ended Jan. 31 of just 32 cents a share, barely half the 61-cent analyst consensus from Thomson First Call. Unadjusted net income slumped 28%.

The company blamed record rains in Southern California and Nevada for soggier-than-expected January profits at its Las Vegas casinos. It also cited poor house winnings at its flagship Mandalay Bay resort, the recent boost in Michigan's gaming tax rates and higher health care costs.

Mandalay shares failed to take much of a hit on the news, but only because investors know they'll receive a fixed $71 a share in cash when Mandalay's acquisition by MGM Mirage ( MGG) is completed. Analysts believe that will happen by April, now that federal and Nevada regulators have given the deal the nod.

MGM Mirage stock, on the other hand, slumped as much 3.1% Friday on heavier-than-normal volume as investors pondered the implications of Mandalay's poor quarter on the acquirer.

Even cutting Mandalay some slack for what could be one-time events -- such as rain and the poor flagship casino winnings -- doesn't appear to explain all of the disappointing results.

"This is as poor an operating performance as we can remember for the last few years from Mandalay," wrote Michael Rietbrock, an analyst at Citigroup Smith Barney. "While there were some mitigating factors (weather, holiday calendar, etc.), even after giving the company the full benefit of the doubt, results were still well below expectations." (Citigroup Smith Barney does and seeks to do business with companies covered in its research reports.)

The poor results were not isolated to the Mandalay Bay or Detroit casinos either, according to Rietbrock, but were "disappointing virtually across the board." All told, the Mandalay report has "clear negative implications" for MGM Mirage specifically and for gaming operators in general, he concluded.

Meanwhile, Robin Farley, an analyst at UBS, contends that Mandalay's poor quarter could give investors pause about current casino stock valuations.

"Not only have gaming valuations moved to the top end of the historic range in recent quarters, but valuations have also been extended by giving operators value for undeveloped land and/or projects that could open several years out, rather than just valuations based on recurring cash flows that already exist," she wrote in a research note. "Those valuation levels could be challenged by a major earnings miss like this." (UBS does and seeks to do business with companies covered in its research reports.)

Despite those broader concerns, Farley is keeping her MGM Mirage estimates unchanged for the time being. She cited statements from MGM management that the first quarter's heavy rains have not affected guidance for a 10% increase in first-quarter revenue per available room, or revpar. Farley also noted the recent opening of a new hotel tower at the Bellagio would bolster the MGM Mirage's revpar significantly by increasing its mix of higher-priced rooms.

"While MGM Mirage may react negatively on Mandalay's results, we feel comfortable that MGM Mirage's first quarter will turn in a solid quarter based on convention business, as well as high-end play during Chinese New Year and the Super Bowl," Farley wrote.

Other analysts are dismissing any broader implications of the Mandalay results, however. Bear Stearns' Joseph Greff argued rain had a disproportionate effect on Mandalay, because it is more dependent on drive-in traffic from Southern California than other Las Vegas properties.(Bear Stearns does and seeks to do business with companies covered in its research reports.)

Although Greff called Mandalay's results "disappointing," he said his own checks with industry sources suggest that other Las Vegas Strip casinos have had more robust business than Mandalay.

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