Expectations are a funny thing on the stock market. If you set a low bar and barely hop over it, investors will pat you on the back. Set a high bar and your stock will be crushed if you miss it.
The latter seems to be in full effect for Melco Crown (Nasdaq: MPEL ) after it reported a pretty decent quarterly report that just didn't live up to Wall Street's high bar.
Revenue cruised 45% higher to $1.06 billion in the third quarter and easily passed the $1.02 billion consensus expected. But as usual, Melco Crown had trouble translating revenue to bottom-line results. Earnings per share were $0.21, a penny below consensus estimates from S&P Capital IQ.
Missing expectations doesn't mean it was a bad quarter for the Macau-based gaming company. Adjusted property EBITDA, the number investors should focus on most closely, was up 76% to $240.3 million in the quarter. At 23% the EBITDA margin still trails that of Las Vegas Sands (NYSE: LVS ) and Wynn Resorts (Nasdaq: WYNN ) , but we've seen steady improvements in margin efficiency over the past year.
A value bet in Macau
What's attractive about Melco Crown now is that the company is becoming a great value with lower risk than leveraged counterparts like MGM Resorts (NYSE: MGM ) and Las Vegas Sands. At just below $10 per share, Melco has an enterprise value/EBITDA of under nine, with just $1.23 billion of net debt.
With $240.3 million of property EBITDA in just one quarter and a strong growth rate, it's conceivable that Melco Crown could be debt-free within a year if it focuses on debt repayment. The other option is to expand the business with Studio City or other gaming options in Asia.
I see light through this fog
The market might not be happy with the quarter from Melco Crown, but I think shares are starting to enter my wheelhouse. Melco Crown's continued strong growth and location in the center of Cotai make it a hot spot for entertainment and gambling.
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