MGM vs. Wynn - MGM's Poor Bets
Margie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Warren Buffett always says that outstanding management is one of his requirements to invest in any company. With that in mind, let’s take a look at the differences in how two prominent casino companies, MGM Resorts International (NYSE: MGM), and Wynn Resorts, Limited (NASDAQ: WYNN) are managed, and some of the key decisions made by the CEOs which are reflected in today’s stock prices. I believe that a strong case can be made that one is extremely well managed, while the other has dice rolling buffoons at its helm.
MGM stock’s soared with the housing market, reaching over $91 a share in October, 2007. Since then, the stock has plunged over 90%, sitting just above $9.00 a share today. Wynn Resorts fell from over $164 a share, to $93.00 today during the same period. That’s not to say that WYNN has done well, but during that time it is paid out some large special dividends to shareholders, while MGM has paid out zero, and Wynn hasn’t fallen nearly as much.
With the economy soaring, and the housing bubble filling with hot air, MGM announced a joint venture with Dubai World to create an eight billion dollar plus complex in Las Vegas. In the meantime, Steve Wynn diversified away from Sin City, putting his resources to play in Asia, specifically Macao.
Jim Murren, MGM’s CEO, apparently got suckered in by the easy money doled out by the housing market. It’s very easy to make a ton of money as a casino/ entertainment company when people are using their house as a piggy bank, assuming that its value will continue to increase, and taking out loans from banks all too willing to lend with this expectation in mind.
Investors reacted by pushing up stocks, especially the high beta casino stocks, into the stratosphere, believing that these “good times” would go on forever. Of course, predictably, gravity took hold, pulling the housing market and casino companies fortunes down with it.
MGM’s City Center development opened in a bad economy with a thud, creating an unprecedented debacle for the company, not performing nearly up to expectations, and leaving the company mired in debt that nearly bankrupted it, and still on a precipice when its bonds come due. I saw a CNBC interview with Murren, and he sounded confident that he could get refinanced. Until he does, those are just words.
To let you know some more bumps in the City Center road, this article explains how MGM continues to literally try to tear down the most expensive complex ever built, at additional cost to shareholders.
In contrast, over this time Steve Wynn invested largely in Macao, and his company has been increasingly profitable ever since, even with Las Vegas acting as a drag. Despite missing targets for the latest quarter, WYNN still earned a $1.38 per share in quarter two, a 30% increase over the same quarter last year.
So when I read fellow Fool, Himanshu Poddar, write about Wynn Resorts, “The company has been planning to run another Macau resort, called the Cotai Project, with a total spend of around $4 billion, I thought this is definitely a bold step since it has already been facing difficulties in fighting a slowdown in the region. Spending so much on a huge project like this does not look acceptable at this point in time, though it might come as a strong move against competitor Las Vegas Sands’ recent initiatives.” I have to look at a piece of the puzzle he might not be aware of, which is the fact that Macau’s visitation is not nearly as high as it could be, as onerous restrictions by the Chinese curtail the number of Chinese tourists to the gambling mecca. Steve Wynn has often made this point, when discussing Macao, and if there’s one person in gaming you can “trust,” it’s probably Steve Wynn, with his impeccable resume in terms of creating shareholder value, from his days at the Golden Nugget to creating The Mirage with the notion, “if you build it, they will come,” to being bought out by MGM, and then creating Wynn Resorts.
This is why when Steve Wynn states that he is planning to create another Macao resort in a tough economic climate, I don’t shake my head in dismay. This management, as I mentioned at the beginning, has an unparalleled track record in the gaming industry.
Wynn is not a spendthrift, and chooses projects carefully. While MGM was building City Center Las Vegas, Wynn stated publicly his competitor was leveraging itself to the hilt, and was making a move history would likely deem unwise. It looks like history has proven Steve Wynn correct. After all, no one has ever won money betting against him. Especially not in his casinos.
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