Commentary: New MGM team turns bottom line around quickly

Monday, March 25, 1996 | 11:59 a.m.

"Gentlemen who prefer bonds ... don't know what they're missing."-- Peter's Principle No. 2 from "Beating the Street" by Peter Lynch

IN SUPPORT OF Peter's Principle No. 2, I set forth the case for long-term rewards or the lack thereof for an average portfolio of stocks vs. the more conservative route of putting all of one's money into long-term U.S. Treasury obligations.

During a lifetime of savings, say about 60 years, a very average stock portfolio far outperforms the same amount of money placed in long-term Treasuries.

This column doesn't recommend individual issues or offer advice, but to suggests investors consider the merits of owning a piece of Las Vegas through ownership of a portfolio -- however small or large -- of some of our better-situated public companies.

Peter Lynch's Rule No. 2 could not be better demonstrated than by what has occurred to Southern Nevada's gaming stocks to date in 1996. The GAX index of gaming stocks, heavily weighted with Nevada's public companies and traded on the Chicago Board of Options Exchange, has gained nearly 25 percent so far in the first quarter of 1996 (217 to 270).

The gain is more than triple the increase in the Dow Jones Industrial Average of about 7.1 percent.

Leading the pack in 1996 is our old friend, MGM Grand, which has increased in price from about $23 at 1995's year end to the present $39 -- a gain of about 69 percent.

In mid-June 1995, the much-respected Terry Lanni, formerly chief operating officer at Caesars World, became chairman and CEO of MGM and Alex Yemenidjian became president and chief operating officer. At that time, Lanni indicated that there was quite a bit of work ahead and candidly indicated that major capital expenditures would be required to "fix" MGM. I made a mental note to be sure and follow the numbers, thinking that prospective investors would have plenty of time to make up their mind. Wrong again, Dave!

The SEC requires gaming companies to report (forms 10Q and 10K) quarterly, with annual results broken down by revenue and costs of the major departments -- casino, rooms, food and beverage and all other.

Note from the table the comparison of the six quarters (the four quarters of 1994 and the first two quarters of 1995) of MGM's prior financial record under the former management and the two quarters of operating history during the brief Lanni-Yemenidjian regime. What is surprising is that there has been so much improvement across all of MGM Grand's business in so short a time.

The table clearly makes a strong case that department operating income (pre-depreciation, administration, corporate expense and taxes) has been dramatically impacted throughout the spectrum of MGM's business since the new management team has been installed. Note in particular that the improvement in entertainment, retail and other is even greater than the improvement in casino operations.

One can only wonder that these improvements may suggest in terms of overall earnings margins if either present trends persist or if MGM were to experience an abnormally high casino-win percentage.

One thing appears relatively certain: The new management team has been able to accomplish across-the-board profit improvement in a very short period. Small wonder that Wall Street is again paying close attention to MGM Grand and that the stock is leading the group so far in 1996. Congratulations to the new management.