MGM Mirage’s Stock Is No Illusion; Sad, Sad Tale at Unisys

MGM Mirage (MGG) Jim: Buy

Mike: Buy

Jim: This stock brings us back to the gaming sector, which is one of your favorites, right, Mike?

Mike: Yep. Except my last couple of picks left me feeling like I’ve watched the dealer hit a natural while I was holding at 20. I keep getting slapped down. But you know what? I’m stepping back up.

Jim: Really?

Mike: I’m putting my money back down on the felt.

Jim: You’re recommending the stock before we even start?

Mike: I am.

Jim: Guess what? Me, too. Now, we discussed Mirage Resorts many moons ago, but then Mirage was bought in June by MGM Grand, which is controlled by that octogenarian billionaire Kirk Kerkorian, to create MGM Mirage.

Mike: In fact, Kirk owns nearly 65% of this stock.

Jim: But let’s step back a bit. Mirage, of course, was run by the flamboyant Steve Wynn. And it stands to reason that the only one powerful enough to take over his company would be Mr. Kerkorian, who has been a fixture in Las Vegas for what, four decades now?

Mike: I think Kerkorian has the distinction of having built not once, but three times, the largest hotel in the world. The first one was the International Hotel; then came the first MGM Grand, which had a famous fire many years ago and is now Bally’s. And now there’s the existing MGM Grand, which is a 5,000-room behemoth. I mean, that place is a zoo--but a well-appointed zoo.

Jim: And besides the MGM Grand, look at what other properties MGM Mirage now runs on the Vegas Strip: the Bellagio; the Mirage; New York, New York; and Treasure Island, to name just some.

Mike: Let’s not forget casinos in Atlantic City, N.J.; Biloxi, Miss.; which is a big gambling venue; Detroit and Australia. That Detroit casino is very successful and actually challenges my position that there is nothing morally wrong with casino gambling.

Jim: Why do you say that?

Mike: Because the part of that axiom that I usually don’t say is that there is nothing wrong with casino gambling in the right place. And the right place is segregated in gaming towns such as Las Vegas and Atlantic City. It doesn’t belong anywhere near a city like Detroit or Chicago.

Jim: Let’s get back to Vegas, where MGM Mirage now controls more than 18,000 rooms. My take on this stock is simple: I like having Mr. Kerkorian on my side as an investor. I won’t call him ruthless, but there’s nothing sentimental about how he runs companies. And I see him taking zillions of dollars of overlapping costs out of the combined companies, which will swell its profits.

Look, it was no coincidence that one of his first acts was selling more than $100 million worth of art that Wynn had put in his properties.

Mike: Of course, the joke is that 80% to 90% of the costs that MGM Mirage has taken out of Mirage so far came from selling the art. And they say there’s still some of that art for sale, if anyone wants to bid for Rembrandt’s “Aristotle Contemplating the Bust of Elvis.”

Jim: OK, so Kerkorian’s got great properties, he’s cutting costs and he’s got a strong gaming market right now, with visitor traffic to Vegas very healthy.

Mike: Plus he’s got a strong management team, led by J. Terrence Lanni. Lanni’s one of the savviest operators on the Strip. He cut his chops at Caesars and then went on to MGM, where he’s done a great job.

Jim: Also, MGM Mirage now controls more than 50% of the Vegas baccarat business. Now, I know this isn’t one of your favorite games, Michael, but . . .

Mike: All I’ve said is that professional card players do not play baccarat, for the simple reason that, unlike blackjack, baccarat is not a game in which card-counting can gain you an edge. And that’s what the pros do.

Jim: In other words, you can’t cheat at it.

Mike: Let me set you straight, Jim. Card-counting is not cheating by any standard, including the legal one. It’s the highest expression of gambling skill. And if you think I’m kidding, try to do it.

Jim: Whatever. The point is, lots of high rollers love baccarat, and it brings the casinos lots of cash.

Mike: Right, it’s a favorite game of Asian and South American high rollers. And casinos such as the MGM and Mirage properties spend scads of money to ship these rich guys in because their play is so lucrative. In fact, the casinos often discount their losses.

Jim: You’re kidding.

Mike: No, they’ll give back some of the money the high rollers lose because the companies still come out ahead, even after counting the costs of providing limos, private planes and private dealers in tuxedos.

Jim: Now since the MGM Mirage merger closed in June, the stock hasn’t done much. But I see it taking off after the company posts a couple of quarters’ results, which I’m betting will meet or exceed Wall Street’s forecasts. And with the stock selling for 22 times this year’s expected per-share profit, it’s attractively priced, too.

Mike: Even though some people think consumers’ interest in gaming has peaked, I don’t. Las Vegas attendance is going to keep rising, and with the Asian economies coming back, attendance from that part of the globe is going to climb.

Jim: So you’d buy the stock even if you don’t like MGM Mirage property in Detroit.

Mike: Look, it’s terribly immoral to put a casino that close to a major population center, and to suck off the little money that many people living in those cities have left. But let’s face it, it’s a great business and that site is going to be very successful for MGM Mirage. And it’s one more reason why this stock is a great buy.

Unisys (UIS)

Jim: Don’t buy

Mike: Don’t buy

Mike: Before we dissect this big computer company, Jim, I want to note that in August 1997, when Larry Weinbach took over as Unisys’ chief executive, one of the first things he did was pull out his checkbook and write a $1-million check to buy Unisys stock as a show of confidence.

Jim: By the way, where did you read that?

Mike: In a story you wrote--there, you happy now? The point is that, assuming Mr. Weinbach still has his shares, he still has his million dollars. But once you’ve said that, you’ve said everything, because this stock recently dropped back to just about where it was when he took the job. And therein lies the sad, sad tale of Unisys.

Jim: It’s really a shame. Now, our older readers might remember that this company is an outgrowth of what used to be called the “bunch.”

Mike: Right, it was actually two-fifths of the “bunch,” which existed in the ‘60s and ‘70s. In those days the computer business consisted of, one, IBM, and, two, everyone else--known by the acronym from their names: Burroughs, Univac, NCR, Control Data and Honeywell.

Jim: Univac eventually became Sperry, which merged with Burroughs in 1986 to create Unisys.

Mike: And it’s been struggling almost ever since.

Jim: Unisys, in fact, was given up for dead in the early 1990s. Basically, its big-box computers were seen as hopelessly out of date against the likes of IBM, Sun Microsystems and others.

Then Mr. Weinbach came along in ‘97, as you said, and turned this company around for a while. Unfortunately, he kept turning until it went 360 degrees instead of stopping at 180.

Weinbach got off to a good start by having Unisys rely less on its machines and more on its services--in other words, running big, complex computer operations for large companies and organizations. It worked for a while. He cut Unisys’ big debt load, got its earnings and revenue growing, and boosted the stock. Get this, the stock sold for $2 a share in the early ‘90s, but between early ’97 and mid-’99 it soared more than fivefold.

But then the old Unisys resurfaced.

Mike: This stock has lost 60% of its value in the last eight months. One big problem is that, yes, it got into computer services, but that’s not exactly a patentable idea. Everybody else is in services, including--guess who--IBM.

Also, Unisys clearly suffers from a lack of what Wall Street calls “visibility.”

Jim: Meaning?

Mike: Meaning that if you’re going to hire somebody to run your computers, how many companies do you go through before you start thinking of Unisys? The answer is: Plenty. It’s pretty far down on the list.

Jim: Worse, Unisys’ results have disappointed Wall Street a number of times now, and the stock has gotten battered on each occasion. So now the stock trades for a little more than $12, which also just happens to be where its price-to-earnings multiple is languishing. I’m not surprised. Given Unisys’ long history of problems, any misstep was bound to convince investors that the old Unisys was back.

Mike: So which way do you lean?

Jim: I can’t recommend this stock. Frankly, I was rooting for Unisys to prosper, but the facts speak for themselves. The company is struggling again, it doesn’t have the visibility, as you mentioned, and Wall Street is frowning at its stock. I wouldn’t bet against Unisys making one more comeback, but I also wouldn’t make that bet by buying its stock.

Mike: I agree. This company is like the proverbial tail of the salamander.

Jim: I haven’t heard that one.

Mike: That’s because I just contrived it. When the salamander gets moving, the tail is going to be the part that moves last. When investors look at the large-scale computer industry and try to figure out where to put their cash, they’ll focus on the front of the salamander--namely the industry leaders--and once again Unisys will be at the tail end.

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Write or e-mail with a stock you would like to see discussed in this column. Peltz (james.peltz@latimes.com) covers the markets and corporate financial trends. Hiltzik (michael.hiltzik@latimes.com) covers technology and entertainment and is the author of the book “Dealers of Lightning: Xerox PARC and the Dawn of the Computer Age” (HarperBusiness). Either can also be reached at Business Section, 202 W. 1st St., Los Angeles, CA 90012.

You can hear a preview of Peltz and Hiltzik’s weekly column Mondays on the KFWB-Los Angeles Times Noon Business Hour on KFWB-AM (980).