Is Melco Crown Still a Top Stock?

Last month I called Melco Crown (Nasdaq: MPEL  ) the best stock in gaming over rivals Wynn Resorts (Nasdaq: WYNN  ) and Las Vegas Sands (NYSE: LVS  ) . Since then, the stock is up 11.7%, slightly outpacing Las Vegas Sands' 10.6% gain and Wynn's 10% rise. If we go back two months, the stock is up an even more impressive 30%. So does this quick rise mean investors should take a profit and run?

Macau's slowdown continues
One of the concerning trends for gaming investors is the drastic slowdown in Macau's gaming growth. In the last few years, investors could count on tremendous growth in Macau's gaming numbers to drive earnings up across the board. But in three of the last four months, gaming revenue has only risen in the single digits, highlighted by a 1.5% increase in July.

This is a concern for every company with exposure to Macau, because this has been the driver of growth.

Supply still constrained
The flip side to Macau's slowdown is the constrained supply for the next few years. Las Vegas Sands is continuing its phased opening of Sands Cotai Central, but when that is complete next year, the industry will go into a period where supply will remain constant for a few years.

Las Vegas Sands, Wynn Resorts, MGM Resorts (NYSE: MGM  ) , and SJM all have sights set on further expansion on Cotai, where the center of Macau's gaming is clearly headed, but it won't be until around 2016 that a resort is opened.

Attractive end markets
Melco Crown has the advantage of being the only major gaming company that only has properties in gaming's most attractive markets. Las Vegas Sands and Wynn Resorts have large properties in Las Vegas. MGM Resorts is still a Las Vegas-centric company and Caesars Entertainment (Nasdaq: CZR  ) can't break into Asia, relying on Las Vegas and the weak regional gaming business for most of its revenue.

Melco is also adding a resort it partially owns in the Philippines and another joint venture at Studio City in Macau. The Macau and Philippines markets should continue to grow more than U.S. markets (although growth may slow) and provide positive trends for Melco Crown.

Value
Where Melco Crown still has a clear advantage over its rivals is in value for investors. The company trades at an enterprise value of 8.5 times property EBITDA, lower than the four rivals I've mentioned. Las Vegas Sands trades at 11.6 times EBITDA, Wynn 9.2 times, MGM 10.3 times, and Caesars 10.0 times. Even if you add a potential increase of $1.0 billion in EBITDA (which is likely an overestimate) for Las Vegas Sands' Cotai Central resort, the largest gaming company in the world still trades at 9.2 times EBITDA.

Value is important because over the long-term, gaming stocks will be priced based on the cash flow from their businesses, which is why we use EBITDA as a proxy.

What I'm concerned about for all gaming stocks is that value has increased sharply in the last few weeks. With growth slowing in Macau, an EBITDA above 8 isn't a screaming buy to me like it would have been a year or two ago.

Foolish bottom line
We won't likely see much growth in earnings from gaming companies in the short term and could see a decline again in the third quarter, so I'm not nearly as bullish as I once was. Melco Crown may still be the best stock in gaming, but it isn't a great buy at the current price.

Over the next few days, if gaming stocks hold their gains, I will look at taking some profit off the table heading into a quarterly announcement that probably won't be impressive for anyone in gaming. I've learned that when gaming stocks are no longer a value, it's time to cash in your chips. I think we've reached that point for the time being.

If you're into gaming stocks, you should check out our premium report on Las Vegas Sands. It comes with a year of free updates on this fast-changing industry, so you'll always be on top of key events. Click here to get your copy.

Fool contributor Travis Hoium manages an account that owns shares of Wynn Resorts and Melco Crown. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

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  • Report this Comment On October 02, 2012, at 10:11 PM, 10HighSigns wrote:

    Do you know?

    The majority-owned Melco Crown Entertainment Ltd project Studio City will be able to apply for a casino, Secretary for Economy and Finance Francis Tam Pak Yuen told reporters on Friday.

    This was the first time a government official had said so, after a string of statements to the contrary.

    Mr Tam said the government had already agreed that Studio City could apply for a casino in 2006, when the original investors in the project requested it.

    Mr Tam also admitted that some of the new 2,000 live gaming tables to become available until 2023 under the 3-percent average yearly growth rate cap to be introduced next year, could go to Studio City.

    Melco Crown only bought into Studio City last year, but it has always said the project would include a casino.

    Earlier this year, the government revised the land concession contract for the project, but still didn’t include any casino facilities in it.

    According to some analysts, the Studio City casino will be allowed under a service provider agreement.

    This method has previously been allowed for gambling facilities in new hotel-casinos that are not fully-owned by a gaming operator, as it is the case of Studio City. Because the land has been granted to companies that don’t have a casino licence (or are not fully-owned subsidiaries of a concessionaire), the inclusion of gaming facilities in the land contract could have raised legal issues.

    However, in such cases, the request to include a casino can therefore be made separately from the land concession request, and by a licenced gaming operator.

    The gaming licence holder needs to request government approval to operate gambling facilities as a service provider at those properties.

    This is the kind of arrangement that allowed the Ponte 16 and L’Arc casino-hotels to accommodate gaming facilities.

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