Mandalay stock sales continue to stump investors

Wednesday, Oct. 15, 2003 | 11:17 a.m.

SUN STAFF AND WIRE REPORTS

Insiders at Las Vegas casino operator Mandalay Resort Group, who have watched their stock rise to all-time highs in recent weeks, took some of their winnings off the table with the sale of more than $200 million in company shares since the beginning of September.

Seven company insiders sold nearly 5.3 million shares for about $210 million, or an average price of $39.93 a share, according to data from Thomson Financial. Mandalay shares traded at $40.03 Tuesday afternoon.

The stock sales stand out both for Mandalay and the gaming industry. Mandalay insider sales exceeded $100 million in September and again in the first two weeks of October. Before those two months, the entire gaming industry had seen only one month in the last five years in which sales exceeded the $100 million mark. That was in July, when industry insiders sold $192 million in stock -- including about $97 million in sales by Mandalay insiders.

Kevin Schwenger, insider analyst for Thomson Financial, said much of the selling could be accounted for as a result of the stock's rise in price. The stock recently reached an all-time high above $42, and Schwenger said that insiders normally can be expected to liquidate shares after such a rise.

"Any selling you see right now is sort of understandable," said Schwenger. "There's an opportunity there that wasn't there a year ago."

Part of that opportunity, said Schwenger, is the chance to cash in on stock options that insiders often receive as compensation. But fewer than a fifth of the shares sold in September and October were sold after options exercises in those months, according to data from Thomson Financial.

David Coleman, editor of Vickers Weekly Insider Report, said the sudden dramatic rise in insider sales at Mandalay is "a red flag," even if some of those sales can be attributed to the rising stock price.

"No doubt that's part of it," Coleman said, "but if I owned the stock I would reconsider my holdings and at very least rebalance my portfolio accordingly."

Joseph Greff, managing director and gaming analyst for Fulcrum Global Partners, said his firm rates Mandalay a buy, but the insider sales caught his eye.

"We certainly understand," Greff said, "that investors are saying, 'Why are these guys selling?"'

Greff argued that stock sales are made more likely by the recent cut in the capital gains tax. At the same time, Mandalay is one of the few gaming companies with a dividend -- the yield is about 2.5 percent -- and the elimination of the dividend tax has provided an incentive to hold shares.

Greff, who holds no Mandalay shares himself and whose firm does no underwriting for the company, said Mandalay benefits from the desire of travelers to stay in the United States and from the relative low cost of tourist travel to Las Vegas, the location of the company's South Seas-themed flagship resort, Mandalay Bay.

Moreover, he said, Las Vegas is winning lucrative convention business from competing cities such as New Orleans.

Mandalay is attracting conventioneers with its new convention center that opened up in January, he said, "and in December, they're going to open up a new hotel tower."

Greff said that Mandalay gets a higher proportion of its revenue from hotel rooms than many of its competitors, and therefore stands to benefit from rising room rates. Each dollar rise in room rates puts 5 cents a share on the company's bottom line, Greff said.

Schwenger said the true test of insider sentiment will come if Mandalay's stock price recedes and the selling continues. Greff said he interprets the sales as an isolated incident that doesn't reflect on the underlying value of the stock.

"We're looking at this as a one-time event," said Greff. "We're willing to give management the benefit of the doubt -- this time -- but investors are scratching their heads."

Mandalay executives have declined to answer questions about the stock sales. But in a statement issued Oct. 3 about the flurry of stock sales, Mandalay Senior Vice President John Marz said: "Such sales by corporate executives are personal decisions.

"Speculation that this sale of stock is a signal of a shift or change in the management of this corporation is misguided and uninformed," Marz said. "The team that has brought Mandalay Resort Group to its success and diversity in recent years will remain intact and will continue to guide this company to future business achievement in the resort casino industry."

The Las Vegas Sun

and Dow Jones Newswires contributed to this report.