The market was already in a downtrend today after worse than expected retail sales, Casino operators took an exceptionally huge hit. The selling was sparked by an announcement from MGM Mirage(MGM) of plans to raise some $2.5 billion in capital in an effort to pay down their massive debt load. There is no question that MGM investors have serious concerns about the amount of debt that the company is carrying, and in raising more equity capital they are intending to deal with this problem, especially as maturities are set to come due in 2010. However, the market sold off hard, and the entire sector was effected MGM was down 29%, Las Vegas Sands(LVS) fell 15%,Wynn Resorts(WYNN) off 12%.

OckhamThese Casino stocks have been extremely volatile lately, hitting extremely low prices as the market bottomed. Since that time, the casinos were on a major hot streak as MGMand LVSup more than 500% from the lows. But it seems that investors have had enough and are cashing out on these stocks. Today it would seem is a perfect profit taking opportunity as there are still difficult times ahead for these casinos and assets sales are certainly possible.

“We’ll be keeping on eye on both of those shares today BB&T and MGM, an avalanche of equity that has been coming to the market has been astounding. And some people say, hey, may not be quite enough money out there to absorb all of this, which may be why we’re down a look at MGM on that news. Down substantially but up a lot from where it was only a handful of weeks ago. Erin, back to you.”CNBC’s Squawk on the Street 5/13/2009

David Faber brings up a good point, as many companies are offering additional equity to the market right now, at some point it can be too much. For now that is not a huge concern, and this seems to be much more likely to be investors getting off of the wild ride that has been casino stocks. At Ockham, we are reaffirming our Fairly Valued valuation of MGM shares

as the stock still looks relatively cheap compared to historical norms.

However, the attractiveness ends there, MGM has far too much debt as has been well noted, and as of the end of the first quarter the company’s current liabilities were 8 times greater than their current assets. Even with the injection of fresh capital, it seems a asset sale will probably be unavoidable at some point. Furthermore, the company is predicted to have negative earnings through 2010 and beyond, which is certainly a difficult situation with this much debt. Our analysis suggests that this stock is not a good investment prospect as buying shares seems more inline with a short term speculative goal.


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