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MGM Resorts International (MGM - Analyst Report) posted mixed second quarter 2014 results. Earnings beat the Zacks Consensus Estimate while revenues missed the same, though marginally. Share price of this casino company declined 2.2%, which we believe was due to the concern related to slowdown in Macau gambling revenues. The company earns a major part of its revenue from Macau.

MGM Resorts’ second-quarter 2014 adjusted earnings of 21 cents per share comprehensively beat the Zacks Consensus Estimate of 12 cents by 75% and were up significantly year over year. The upside reflects improved performance in Las Vegas, its domestic operations.

 



In the quarter, total revenue increased 4% year over year to $2.58 billon driven by an increase in revenues from Las Vegas operations. However, it missed the Zacks Consensus Estimate of $2.59 billion by 0.4% possibly due to a sluggish Macau market.

Adjusted Property EBITDA was $643 million, up 8% year over year, owing to an increase in revenues and a decline in expenses. EBITDA margin increased 90 basis points (bps) due to increased contribution from the high-margin main floor business.

Domestic Operations

The company’s owns and operates several properties spread across Las Vegas. Apart from this, the company boasts several assets in Mississippi and Michigan.

Casino revenues from wholly-owned domestic resorts increased 6% due to a 320 bps increase in table games hold percentage, partially offset by a slight decline in slots revenues. Room revenues increased 6%, primarily attributable to a 6% rise in revenue per available room (RevPAR) at Las Vegas Strip properties due to higher average daily rate. RevPAR growth exceeded managements’ expectation of 5% growth. The company expects RevPAR growth of 3% for the third quarter of the year.

Operating income for the company's wholly-owned domestic resorts increased 23% year over year, primarily due to an increase in room revenues and margins.

MGM China

MGM China’s net revenue declined 1% year over year to $828.0 million due to a decline in revenues from VIP gamblers, partially offset by an increase in main floor table games revenues. Main floor table games revenues were up 41% year over year while VIP table games turnover decreased 18%.

Performance in Macau was not as strong as it had been in the past few quarters. In fact, Macau revenues declined versus growth in the Las Vegas region. This reflects a slowdown in gambling in Macau. The slowdown can be attributed to the fact that high-stake gamblers are curtailing spending amid a cooling Chinese economy.

Also, the nationwide crackdown on corruption in China has compelled Macau officials to impose restrictions on VIP gamblers in order to stop billions of dollars from being siphoned off illegally from mainland China to Macau. This also impacted the company’s performance in Macau.

The decline can also be attributed to the football World Cup that began on Jun 12 had diverted some bettors and tourists away from the world’s largest gambling hub. As a result, gross gaming revenue in Macau for the month of June declined 3.7% to $3.4 billion – the first instance of decline since Jun 2009.

MGM Resorts’ operating income was $134 million in the quarter, up 6.3% year over year, owing to an increase in Main floor table games revenue.

Income from Unconsolidated Affiliates – CityCenter Holdings

MGM’s urban complex CityCenter operates through two segments — Resort and Residential. Under the Resort operations, the company boasts four properties — Aria, Crystals, Vdara and Mandarin Oriental.

Net revenue from CityCenter declined 4% year over year to $320 million due to weak performance at CityCenter’s Residential operations. Net revenue from Resort operations grew 8.7% year over year to $304 million with a rise in sales across all its properties. Residential sales in the quarter were $15.8 million, down 70% year over year.

CityCenter’s adjusted EBITDA improved 20% year over year to $81 million primarily benefiting from higher table games hold percentage.

Our Take

It seems that growth in Las Vegas made up for the sluggish growth in Macau. Given the scenario, we expect the company to remain under pressure due to a crackdown on illegal money transfers, credit growth concerns, tighter restrictions on visas and an impending smoking ban in the casinos in Macau.

Nevertheless, we expect MGM Resorts’ strong brand portfolio, improvement in the Las Vegas market and solid mass market revenues to bode well for the company.

MGM Resorts presently has a Zacks Rank #3 (Hold). Zynga, Inc. (ZNGA - Snapshot Report) is a better-ranked stock in the same sector with a Zacks Rank #2 (Buy). Other gaming companies, Full House Resorts Inc. (FLL - Snapshot Report) and Melco Crown Entertainment Limited (MPEL - Snapshot Report) are set to report second quarter results on Aug 7.

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