BUY OR SELL-Is Vegas recovery reality or mirage for MGM?

* Shares up 60 percent so far this month

* Macau joint venture a "hidden jewel"

By Deena Beasley

LOS ANGELES, Sept 25 (Reuters) - Gamblers are starting to head back to Las Vegas, helping shares of MGM Mirage (MGM.N) rise some 60 percent so far this month. But some investors question whether Sin City's recovery will be strong enough to absorb a coming wave of new resort capacity.

MGM's CityCenter, a multi-tower enclave of casinos, hotels, condominiums and shops being developed in partnership with Dubai World, will begin a phased opening on the Las Vegas Strip in December.

EARNINGS UNDERESTIMATED?

Cost-cutting has helped MGM weather the recession and will bolster its bottom line in coming quarters, although its borrowing costs are climbing as the highly-leveraged casino operator refinances its debt at higher rates.

Some analysts think the potential of the world's second-largest casino operator has been underestimated.

The number of visitors to Las Vegas fell 1.3 percent year-over-year in July, compared with a drop of 6 percent for the first seven months of the year.

"MGM has the most opportunity leverage to a recovery here," said Bill Lerner, a principal at Las Vegas-based Union Gaming.

He said Wall Street's average forecast of $1.6 billion for MGM's 2011 earnings before interest, taxes, depreciation and amortization could be an underestimate of 20 percent to 30 percent.

Others spot a buying opportunity as investor sentiment toward gambling stocks becomes more positive.

The specter of default, and potential bankruptcy, pushed MGM shares below $2 in March, but the company has been able to restructure some debt. Shares traded near $12.30 on Friday -- a steep drop from $31.00 a year ago.

MGM, with nine Strip resorts, is heavily dependent on the health of Las Vegas, but it does possess "one hidden jewel," a 50-50 joint venture with Hong Kong tycoon Pansy Ho in the Chinese gambling enclave of Macau, said Sanford Bernstein analyst Janet Brashear.

Rivals Wynn Resorts Ltd (WYNN.O) and Las Vegas Sands Corp (LVS.N) are planning initial public offerings of minority stakes in their respective Macau operations.

"There is no reason MGM can't follow if the market's telling everyone that they want to pay a premium for assets over there," Lerner said.

Merrill Lynch recently estimated that MGM's 50 percent license in Macau is worth $500 million.

SELL SELL SELL

But Susquehanna Financial analyst Robert LaFleur, who rates MGM as "negative," believes investors appear willing to overlook still-lackluster fundamentals.

"We do not think this is sustainable," he said in a research note earlier this month.

The $8.5 billion CityCenter complex, along with other as-yet-unfinished casino resorts like the Cosmopolitan and Fontainebleau, will add thousands of hotel rooms to the gambling corridor. Lerner estimates an increase of 5 percent in 2010, while Brashear forecasts a 20 percent rise in supply -- pushing room rates down and hurting MGM.

No matter the final total, it will mean competition for existing high-end resorts, including MGM's own Bellagio and Mandalay Bay. That could be doubly problematic for MGM, since half of CityCenter's earnings will go to Dubai World,.

"MGM is still a troubled stock," said Sanford Bernstein's Brashear. "There is almost no possible forecast of positive earnings before 2014." She rates the stock as "market-perform."

Earlier Las Vegas mega-projects like the Mirage in 1989 had no trouble drawing new visitors to the Strip, but the jury is still out on whether CityCenter will create the same kind of buzz.

Brashear expects CityCenter to account for a 4 percent increase in visits to Las Vegas next year. MGM Chief Executive Jim Murren has estimated a pop of 10 percent.

"Incremental supply and higher interest cost will preclude (MGM) seeing 2007 peak earnings," Lerner said. "But for these stocks to work, we don't have to get close to that."

On the debt front, MGM's next big challenge will be the maturity of a $6 billion credit facility in 2011.

"They will have to deal with that within the next year," Lerner said. "I think they still have more than $1 billion in security to give in order to achieve a restructured credit facility." (Editing by Steve Orlofsky)