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At The Motley Fool, we poke plenty of fun at Wall Street analysts and their endless cycle of upgrades, downgrades, and "initiating coverage at neutral." So you might think we'd be the last people to give virtual ink to such "news." And we would be -- if that were all we were doing.
But in "This Just In," we don't simply tell you what the analysts said. We'll also show you whether they know what they're talking about. To help, we've enlisted Motley Fool CAPS, our tool for rating stocks and analysts alike. With CAPS, we track the long-term performance of Wall Street's best and brightest -- and its worst and sorriest, too.
Baby needs a new pair of shoes
You may recall how, back in April, JPMorgan Chase suggested it might be a good idea for investors to buy shares of Melco Crown Entertainment (Nasdaq: MPEL ) . At the time, I advised against this -- and Melco proceeded to lose 24% of its market cap.
Fast-forward five months, and yet another Morgan -- Morgan Stanley, this time -- is singing a similar tune. You see, losing 24% on their investment may not have endeared JPMorgan Chase to its customers, but looking at the stock today, Morgan Stanley points out that it's 24% cheaper than it once was, and a company that may be even more than 24% better-positioned to reward investors.
It's gotta be true. I read it in the Journal
What's got Morgan Stanley all hot and bothered about Melco? In a word: Macau. You see, just as Morgan was going to press with its upgrade on the stock, The Wall Street Journal was announcing a striking rise in the fortunes of gambling establishments in Macau. Gambling revenues across the Chinese entertainment enclave rose 40% year-over-year in August, and according to Asian analyst CLSA, are slated to post a 34% rise in the second half of this year.
What's more, it turns out that Melco is benefitting disproportionately from this rising tide of renminbi. The company leapfrogged Wynn Resorts (Nasdaq: WYNN ) to capture third place in Macau market share last month. At a 17% share, Melco trails only SJM Holdings and Las Vegas Sands (NYSE: LVS ) . (Galaxy Entertainment held onto fifth place, while MGM (NYSE: MGM ) trails in sixth.)
Is bigger is better?
Maybe bigger is better. I presume that's the theory Morgan Stanley is going with. And yet, while investors seem to be swallowing this story hook, line, and sinker, I cannot help but wonder if they're actually being played for suckers ... again.
Consider: Back when that "other Morgan" told us to buy Melco in April, it did so based on several predictions. First, JP told us that Melco was leveraged to the "robust gaming environment in Macau" -- and it seems to have been right about that. If gambling revenues are up across the board in Macau, and Melco is capturing a bigger share of these revenues than it did a year ago, that's the very definition of leverage.
Better than what?
Problem is, that's about the only thing JP got right. Five months ago, JP told investors that perhaps the single best reason to buy Melco in April was the fact that Street earnings estimates for the company had fallen to unprecedentedly low levels. As a result, "near term and longer term Consensus EBITDA estimates" were "achievable/beatable," and JP expected investors would be rewarded with a bounce when the company achieved/beat expectations.
Instead, the precise opposite happened. Melco lost $0.02 per share in the first quarter, then followed up with a $0.06-per-share loss in Q2 -- a result 50% worse than projected.
Last but not least, you may recall that JP also told us Melco's "liquidity" was improving. Now admittedly, the company has a better-looking balance sheet than most companies in the gambling sphere. MGM and Isle of Capri (Nasdaq: ISLE ) , Boyd Gaming (NYSE: BYD ) and Ameristar (Nasdaq: ASCA ) -- they all carry debt loads that are multiples of their own market caps, while Las Vegas Sands isn't much better. Fact is, among the major players at this table, only Wynn has a balance sheet that approaches Melco's in terms of strength. But is it actually improving?
I doubt it. While it's true that Melco's cash reserves rose in each of the last two quarters, long-term debt, which had been on the decline, took a U-turn last quarter and shot up more than $100 million in fiscal Q2. The company continues to keep mum on whether it's achieved free cash flow-positive status. (Hint: When companies have good news to report, they usually do. So when they don't ...)
Foolish final thought
Last but not least, there was the troubling turn of events last month, when Melco's CFO abruptly left office. Call me a pessimist, but I can't help thinking that doesn't bode well for Melco's finances.
From where I sit, therefore, Melco remains a show-me stock. After accumulating more than a half-billion dollars in losses in five years' time, after burning through $2.8 billion worth of shareholder cash, I'm simply not interested in gambling on this one.
Melco Crown's stock has lagged the market badly over the past year. How do you tell a bargain stock from a value trap? Find out here.