Merrill Lynch is out downgrading MGM Mirage (NYSE:
) to Neutral from Buy while lowering their target to $8 (prev. $11).
MGM has taken an increasingly aggressive strategy toward booking group business in late 2009, ’10 and ’11. While this helps to fill MGM’s huge 33.7K room inventory, it effectively locks in lower rates, meaning MGM’s earnings snap-back could be delayed. No signs of group volume recovery by the hotel companies, means pricing will remain challenged for at least the rest of ’09 and likely longer.
Supply picture may not be improving as quickly as thought
Merrill continues to believe supply risks from CityCenter cannibalization (6K rooms, +6% growth) are understood, but the Fontainebleau LV (4K rooms, +4% growth) bankruptcy in June and slow progress on Cosmopolitan (3 rooms, +3% growth) were incremental positives. Now, there are signs that Fontainebleau LV could be worked out and Cosmopolitan (appt’d a new CEO) could open late ‘10, meaning supply of an add’l 7K high end rooms (+7% growth) will continue into late ‘10/’11.
Credit separation from equity a bad signal
In the last run, MGM’s debt and equity moved in lock step, as reduced likelihood of bankruptcy was positive for both. This hasn’t been the case recently w/equity rallying 36% (vs. S&P 11%) but LT debt (Jan 17 7 5/8) narrowing slightly from 64.5 to 66.25. With $12B in debt and a quick profit snap-back in ’10/’11 less likely due to locked-in rates + supply, add’l dilution for equity holders is a continued risk.
Notablecalls: The call has some new info (negative) and will likely work. You can get some decent fills in the pre market and cover lower later in the day.
MGM does not have any Macau assets to monetize so it's pretty much dying a slow death.
Right now I'm interested if it can go sub-$7 or not. With a little help from the market I think it can.
