MGM Puts still looking good

Four issues are driving down MGM's profits. Three are known, 1 I uncovered.

http://www.marketwatch.com/news/story/airfare-hikes-capacity-cuts-start/story.aspx?guid=%7BF6045F48%2DC0C8%2D44ED%2D9CEB%2DFAF1E60E4D24%7D&siteid=yhoof

1. Fewer people are travelling to Vegas.
"there are predictions that total capacity could be down by double-digits percentages or more by autumn, following declines of 3% and 6% in the first and second quarters, respectively"

2. They are gambling less when they do go
"April gambling revenues were down 5% statewide to $1 billion, with a 1.3% drop on the Strip"
If that continues, Strip casinos will lose 15% gambling revenues for the year.

3. Hotels room rates are dropping
"average daily room rates (ADRs) on the Strip in the second quarter were 13% (down) over the same period in 2007, with weekdays off 10% and weekends down 17%. "
An MGM spokesman "noted that when the company reported its first quarter earnings, it said that occupancy was flat with rates down slightly. 'This will likely continue through the end of the year...'"

And now the 4th issue
4. Surging electricity costs
According to the EPA, the average large Vegas Casino uses 100m kwh per year or ~$9M annually per hotel. MGM in Vegas has the Mirage, MGM, Bellagio, Circus Circus, Excalibur, Luxor, Mandalay Bay, New York New York, Monte Carlo, and Treasure Island. That's 10 casinos with an annual electrical bill of ~$90M. Add other casinos in Reno, Detroit and elsewhere and we can round up to $100M.

Electricity costs are up 15% in Vegas since last year (they went up June 1st 2007). MGM is looking at an extra $15M in annual costs or ~$4M this quarter. That's ~2% drop in EPS.

Revenues falling 6%, costs going up. Last year, MGM reported $360M in profits fo rthe quarter. I'll be surprised if they beat $200M.

I'm hoping that they see a big miss and the stock drops <$40. That's when I'll unload the puts.