Does ‘Going Concern’ Removal Change MGM’s Position? (MGM)

Last night we had an interesting volume spike alert in the after-hours trading in shares of MGM Mirage (NYSE: MGM).  It turns out that the spike was because the company’s auditor’s report will no longer include the “Going Concern” note.  This is an obvious huge development, but what we wanted to look at is how much this really changes the operational situation and outlook for MGM Mirage.

This comes on the heels of restructuring and paring down where it could, but the biggest boost for the “going concern” lack of relevance is that MGM has raised north of $2.5 billion in new capital this year.

The company recently got its Las Vegas workers to agree to a new 5-year contract with no pay raises until June 1, 2010, a deal which covers more than 2,000 workers in the culinary and bartenders union.

Analysts are still looking for a loss of -$0.30 EPS on total revenue of $5.99 billion for fiscal 2009.  The same estimates for 2010 are -$0.50 EPS on revenues of $5.91 billion.  In this respect, the removal of any “going concern” is a help, but not a savior.

There is at least one direct benefit to the “going concern” note being removed as far as its business operations.  Those booking hotels in the future do not have to sweat it out whether or not their reservations will be honored if there would have been a bankruptcy.  You never know if  suppliers demand tighter terms or looser terms. There is also the notion that suppliers can’t demand stricter terms than normal because they are worried of an imminent adverse impact to their receivables.  There are many other scenarios that this removes, particularly over which funds and investment advisers that can or cannot own the stock.

After almost an hour of trading, shares are up 15% at $6.74.  The opening bell price was $6.37 and the 52-week range is $1.81 to $39.50.

This technically is a scenario that is now “less negative” in a company expected to still face challenges.  But so far Wall Street is taking that as a sign that is good enough.

Jon C. Ogg
June 24, 2009