Las Vegas casino resort business is picking up

David Strow

Wednesday, April 17, 2002 | 11:15 a.m.

Las Vegas casino giants MGM MIRAGE and Harrah's Entertainment Inc. each handily beat first-quarter earnings expectations, propelling the stock price of both companies to 52-week highs this morning.

Both reported two similar, general trends -- a strengthening recovery in Las Vegas and booming business outside of Nevada.

MGM MIRAGE posted net income of $82 million, or 51 cents per share, for the quarter ending March 31. This was down 2 percent from the year-ago period -- but was 50 percent higher than analysts' consensus estimates.

"We are expecting further progress throughout this challenging year," said Terry Lanni, MGM MIRAGE chairman and chief executive.

Meanwhile, Harrah's posted net income before one-time items of $84.8 million, or 74 cents per share -- a 55 percent increase over the year-ago quarter, and 37 percent higher than analyst estimates. And it was the Rio -- the off-Strip property that has struggled in recent years -- that showed one of the biggest improvements.

But the Rio was also behind a substantial one-time write off for Harrah's -- a $94 million non-cash charge. This charge caused Harrah's to report a net loss of $6 million, or 5 cents per share.

MGM MIRAGE stock rose $2.77 to $38.64 this morning, a 7.7 percent gain. Harrah's was up $2.82 to $49.76, a 6 percent increase. Both are 52-week highs.

The buying activity spread to Mandalay Resort Group and Park Place Entertainment Corp., the other two major Strip casino operators. Mandalay hit a 52-week high as well, rising $1.79 to $34.55. Park Place was up 55 cents to $12.20.

MGM MIRAGE, owner and operator of six major Las Vegas resorts, posted revenues of $1.02 billion on the quarter, a 4 percent decline from the year-ago period. Cash flow fell 5.7 percent to $324.1 million.

Though down year-over-year, the performance was far better than the 60 percent decline in net income MGM MIRAGE reported in the fourth quarter of 2001.

"Our business is better because Las Vegas business is better, and Las Vegas is doing better as a tourist city than anyone would have expected," said Jim Murren, president of MGM MIRAGE.

The MGM Grand casinos in Las Vegas and Detroit were the clear stars of the quarter, as both posted increased cash flow. MGM Grand Detroit's cash flow grew 27.5 percent to a record $46.1 million, while MGM Grand Las Vegas saw cash flow rise 15 percent.

However, the MGM Grand Las Vegas increase was inflated by casino hold. In the first quarter of 2002, hold was higher than normal at the MGM Grand Las Vegas, while it was below normal in the first quarter of 2001.

Bellagio's cash flow dropped 7 percent to $86.6 million; New York-New York, down 16 percent to $19.6 million; Treasure Island, down 17.5 percent to $25.6 million; Mirage, down 26.5 percent to $40 million; and Golden Nugget Las Vegas, off 27.5 percent to $8.6 million.

Away from Las Vegas, the company's properties generally fared better. Beau Rivage in Biloxi, Miss., reported $15.5 million in cash flow, up 7 percent. The three casinos in Primm posted $10.6 million in cash flow, down 7 percent. And the Golden Nugget in Laughlin was up 28 percent to $1.9 million.

Room rates were down universally at the MGM MIRAGE Las Vegas properties, from a 3 percent drop in average daily rate at the New York-New York to a 16 percent decline in ADR at the Treasure Island. The Bellagio, considered a benchmark property in setting high-end room rates on the Strip, reported an ADR of $177, down 9 percent.

But one of the biggest factors for MGM MIRAGE may have been its rebounding high-end business.

Immediately after Sept. 11, MGM MIRAGE reported a loss of 50 percent of its high-end play, and 75 percent of international high-end play. Now, Lanni said, "it's fair to say the international side is still down, but nowhere near where we were."

Domestic play is now down a "low single digit" percentage, Lanni said, while international is down "very low double digits."

Meanwhile, strength both in Las Vegas and elsewhere boosted the earnings of Harrah's.

The casino operator posted revenues of $983.7 million, up 13 percent, while cash flow rose nearly 20 percent to $281.2 million.

The $94 million non-cash writedown at the Rio reflected the difference between the price paid for the Rio in 1999 and its estimated value on paper. Under new accounting rules that went into effect in January, companies were required to take one-time writeoffs for such differences, rather than writing them off gradually over a long period of time.

Underperformance at the Rio has been a sore spot in the company's earnings in previous quarters, but that was not the case this quarter, as the Rio posted cash flow of $25.9 million, up 14.1 percent over the year-ago period. Harrah's said this was the result of several factors, including cost-control measures, a de-emphasis on international high-end table game business and rising slot business.

That would suggest the Rio was on track to produce in excess of $100 million in cash flow for the year, though company officials stuck to their projection of $80 million.

"We're certainly not finished (at the Rio)," Loveman said. "We had a tremendous first quarter, but it was nothing more than a focus on executing our business plan successfully. We have created a much more efficient and stable business with long-term robust profitability prospects."

Harrah's Las Vegas remained more profitable than the Rio with $29.1 million in cash flow, but its performance fell 8 percent over the year-ago period. Lower room rates and higher promotional expenses were blamed, though the property hit record monthly levels of revenue and cash flow in March.

Away from Las Vegas, the most substantial improvement came in Northern Nevada, where the addition of two Harveys casinos boosted cash flow by 119 percent to $17.5 million. In all, Harrah's Nevada properties reported $72.5 million in cash flow, an increase of 16 percent.

In Atlantic City, the strongest performer was Showboat Atlantic City, where cash flow rose 21 percent to $22.2 million. Combined, Harrah's two Atlantic City properties posted $56.9 million in cash flow, a 13 percent increase.

The Midwest continued to be a strong performer for the company, as cash flow from the region rose 29 percent to $145.9 million. One factor was the addition of two Harveys casinos in Council Bluffs, Iowa, but another was growth at the company's properties. Casinos reporting record results during the quarter included the company's casinos near Chicago, Kansas City, Mo., and Shreveport, La.

On conference calls with investors this morning, both companies indicated they are interested in potential expansion into the United Kingdom. The British Parliament is expected to consider liberalization of that country's gaming laws at some point, which could open the door for Las Vegas-style gaming and resorts.

This wouldn't be a significant departure for MGM MIRAGE, as the company currently has casinos in South Africa and Australia, and competed recently for a gaming license in Macau.

But even Harrah's, which currently has no international casinos, is interested in Great Britain, said Harrah's Chairman and Chief Executive Phil Satre.

The company appears to be most interested in a joint venture opportunity, one that would allow Harrah's to design, build and manage the casino, and give it an equity ownership position.

Under those conditions, "that would be attractive to us," Satre said.