MGM Mirage Stock Slapped With Sell Rating
MGM Mirage Inc. shares fell
Friday after Merrill Lynch advised clients to sell
their investments in the world's second-largest
casino operator because the stock valuation has
already surged to an all-time high.
Merrill Lynch sees limited upside for future investments
in the stock, which more than doubled in value over
the past 11 months to hit a lifetime peak of $46.75
on Thursday. However, the securities firm told clients
that its "Sell" rating is "not a
reflection on the high quality management team or
future growth prospects."
Shares tumbled $1, or 2.2 percent, to $45 in afternoon
trading on the New York Stock Exchange. The stock,
which hit a 52-week low of $19.81 last August, has
climbed steadily since then, and has gained 24 percent
so far this year.
"We would note this is not a reflection on
the management of the company or the company's assets,"
Merrill Lynch analyst David W. Anders said in a
report. "In fact, the senior executives of
MGM Mirage are some of the best in the industry.
However, as equity analysts we need to separate
the stock from the company and given all the good
news priced into the stock, we have reduced our
rating."
The action comes just one day after MGM Mirage
reported its second-quarter earnings climbed 35
percent, boosted by the recent $5 billion acquisition
of Mandalay Resort Group. The company reported a
quarterly profit of $141.2 million, or 48 cents
per share, on revenue of $1.72 billion -- easily
surpassing analyst projections.
MGM, controlled by billionaire Kirk Kerkorian,
also provided Wall Street with bullish guidance
for the third quarter. The company expects to report
operating profit from its 24 properties of 42 cents
per share, in line with current analysts' estimates.
Anders said investors haven't property priced in
the risks involved with MGM's business. The analyst
said the three key factors driving share price are
earnings or cash flow, the discount rate which takes
into account risks, and long-term growth potential.
"We believe that investors understand well
the earnings and growth potential for MGM Mirage,
however they could be mispricing the risks,"
Anders said. "We admit that we could be wrong
with our sell rating as there is always a probability
that the best case scenario could play out, however
there is a higher probability one of the risks plays
out."
Among the risks identified is that supply increases
are on the horizon for Las Vegas, and more rooms
available in the gambling mecca could dent earnings
for casino operators. The city recently saw the
opening of Steve Wynn's latest mega resort, and
Anders believes there's the potential for expansion
by rivals such as Boyd Gaming Corp., Aztar Corp.,
and Frontier owner Phil Ruffin.
Merrill Lynch also listed same-store casino profit
growth is "surpassingly low." The securities
firm analyzed returns at MGM, Mandalay Bay, Harrah's
and Caesars as a proxy for the strip.
The downgrade also rubbed off on other casino operators,
whose shares tumbled in afternoon trading on the
New York Stock Exchange. Boyd shares fell 54 cents
to $52.34 and Aztar dropped 26 cents to $33.70.
Shares of Harrah's Entertainment Inc., which became
the largest casino operator after its acquisition
of Caesars Entertainment, slid 37 cents to $78.68.
Source: AP
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