Mandalay using cash to buy back stock

David Strow

Wednesday, May 17, 2000 | 10:47 a.m.

Mandalay Resort Group of Las Vegas repurchased about 14 percent of its outstanding stock over the past several months, President Glenn Schaeffer confirmed Tuesday.

The move, Mandalay's most aggressive buyback in years, has industry analysts bullish on Mandalay, saying such a move signals optimism about the company's upcoming earnings. One analyst, Jason Ader of Bear Stearns, cited the buyback as partial motivation for raising earnings estimates from 36 cents to 50 cents per share.

"If they're having a tremendous quarter, as this evidence would seem to indicate, they're anxious to show us that their timing was good," said Dave Ehlers, chairman of Las Vegas Investment Advisors. "The only reason for buying back stock, for a company that has debt, is that they think this is a better use of their cash.

"We're not talking about a perfunctory stock buyback. It clearly sends the message, 'We think our stock is cheap and business is good."'

Mandalay is expected to report earnings for the quarter ending April 30 Thursday afternoon. The consensus estimate is 40 cents per share.

On Nov. 30, 1999, Mandalay reported it had 90.68 million shares of stock outstanding. By April 20, this number was down to 78 million shares, according to the company's annual report.

The 12.68 million-share difference was the result of share buybacks, Schaeffer said, and came from Mandalay's free cash flow.

"We wanted to buy some stock," Schaeffer said. "We think it's a good use of the company's free cash flow."

When asked if the move was a signal Mandalay expected strong quarterly earnings, Schaeffer said, "we don't buy by quarters."

"We look over a longer period of time, and we like the direction of future free cash flows," Schaeffer said.

Schaeffer did not indicate the price Mandalay paid for the shares, and wouldn't say if further share buybacks were planned. During the first quarter, Mandalay traded between $13 and $18.25 per share, indicating the company spent at least $165 million for the shares.

In a report last week, Bear Stearns analyst Jason Ader said the purchase price was between $15.50 and $16 per share, with about 12 million of the shares being bought back during the first quarter.

"We believe management will continue to actively look at this option when determining its use of free cash flow," Ader wrote. "While (Mandalay) was able to repurchase its shares at $15.50-$16, we believe the company might now look to pay down debt with some of its free cash flow given the current share price."

Though this will partially assist earnings per share for the quarter, Ader said the company will also benefit from strong operating trends in Las Vegas and better-than-expected results at Mandalay's MotorCity Casino in Detroit. Ader's 50-cent-per-share estimate, if met, would represent an all-time quarterly record for Mandalay.

"(Management) is comfortable with the future," Ader said. "They've resisted share repurchases in times when they were concerned with their outlook, so obviously they're comfortable with the outlook for the future."

Ader also raised Mandalay's annual earnings estimate from $1.44 to $1.64 per share, a move based almost entirely on the share buybacks.

Mandalay had $2.7 billion in long-term debt on Jan. 31, according to the company's annual report -- a $440 million increase over Jan. 31, 1999. While Mandalay paid more than $150 million in interest on this debt in 1999, it does not pay dividends on its common stock.

But Ehlers said stock purchases, rather than debt buybacks, make sense from an investment perspective -- and signals Mandalay's management believes the shares will appreciate more than the company would save by using the cash to pay down debt.

Rather than selling these shares to realize profits, as an outside investor would do, Mandalay could use the shares it bought as currency in an acquisition, Ehlers said. Assuming the stock appreciated as Mandalay management expects, the move would ultimately lower the amount of additional debt the company would have to add if it made an acquisition.

Talk of a stronger-than-expected quarter has rallied Mandalay's stock, which had struggled in earlier months. On Tuesday, it closed at $21.38, up 21 percent from April 20, the last day of the buyback period.

"Mandalay is doing exactly what we believe casino companies should be doing," said David Anders, gaming analyst with Merrill Lynch. "They're using all free cash flow to repurchase extremely attractively valued shares, versus building low-returning projects.

"I would be unhappy if Mandalay did anything else with their capital."

Share buybacks have an immediate positive impact on earnings per share, since they reduce the number of outstanding shares. But Anders believes the move is more significant than a simple recapitalization.

Anders believes Mandalay is sending a strong signal.

"The message is, management believes the share price is undervalued, and does not reflect the fundamentals of their business," Anders said. "(Earnings per share) increases, but the message really is ... that the company is buying back stock rather than building because they think they can get a better return by buying stock."

So far in this earnings season, seven gaming companies have beat Wall Street's consensus estimates by 27 percent, Anders said. But for now, Anders is maintaining his 38-cent-per-share earnings estimate for the quarter.

"I would say, given the strength of Las Vegas and upside surprises, that those trends should positively impact Mandalay," Anders said. "We believe (the first-quarter) number will be strong, and we'll adjust accordingly after the quarterly release."