Any American, and certainly any shareholder of MGM Resorts International (MGM -0.61%) , Wynn Resorts (WYNN -0.57%), and Las Vegas Sands (LVS -0.19%), knows that Las Vegas is the standard-bearer for gambling entertainment in the United States, but is it the top gambling destination in the world? It turns out the answer to that question is an emphatic "no." Take a look at this chart from the Economist that shows total 2012 revenue for the top gambling destinations in the world:
As you can see, gaming revenue in Macau, China dwarfs the revenue of Las Vegas. In 2013, gaming revenue in Macau grew nearly 20% to $45 billion. Compare that growth rate to the 4.8% annual revenue growth rate for Las Vegas, and it's easy to see that the massive gap is only getting wider.
So I hesitate to describe Macau as "the Las Vegas of China" when these numbers indicate that maybe Las Vegas should be considered "the Macau of the U.S.A." We all know that the population of China dwarfs that of the U.S. (1.3 billion to 300 million). However, while the United States has several places throughout the country where gambling is legal (Vegas, Reno, Tunica, Atlantic City, etc.), Macau is the only place in China that legally allows gambling. So why aren't investors flocking to Macau to build new casinos? One major hurdle to expansion in Macau is that companies wishing to build casinos must first obtain a casino license from the Chinese government. Currently, only six such licenses have been permitted, limiting competition to the following license holders: MGM Resorts International, Wynn Resorts, Las Vegas Sands, SJM, Galaxy Entertainment, and Melco Crown Entertainment (MLCO -0.16%).
So which one of these companies should we be buying hand-over-fist? Unfortunately I do not live in China, and since there is no listings for Galaxy Entertainment or SJM Holdings on a major American stock exchange, they are eliminated from the competition.
MGM, Wynn, and Las Vegas Sands are all American companies with casinos in locations such as Dubai, Atlantic City, Vegas, and Singapore. Of course, there's nothing wrong with that fact, but if your investment thesis is that Macau is the place to be for gambling, why would you invest in a company like MGM that owns 11 casinos in Vegas, but only a 50% stake in a single casino in Macau? Wynn Resorts is a perfectly fine company, but $400 million of its Q4 2013 revenue came from Las Vegas, not Macau. And Las Vegas Sands' properties in Vegas, Bethlehem, and Singapore produced over a third of the company's Q1 2014 earnings.
So that leaves Melco Crown Entertainment. Melco owns the massive City of Dreams resort and casino on the new Cotai Strip in Macau, as well as the smaller Altira Casino. Lawrence Ho, CEO of Melco Crown Entertainment, is the 37-year-old son of Stanley Ho, who long ago earned the nickname "The King of Gambling" in Macau because of the 40-year monopoly he once held over gambling in the region. With his son Lawrence, it sure seems like the apple hasn't fallen far from the family tree. Lawrence Ho is young, ambitious, and aggressively growing his company. After opening City of Dreams in 2009, Ho purchased a 60% interest in Studio City, which is set to open on the Cotai Strip in mid-2015. In addition, Ho spearheaded the construction of the $1.3 billion City of Dreams Manila in the Manila Bay area of the Philippines, which on track to open this year and will expand Melco's reach outside of Macau for the first time. In addition to the Philippines, Ho has proclaimed that Melco will be establishing a presence in Russia for the first time by building two new casinos near China's border with Russia. And just this month, Ho announced that Melco plans to invest at least $5 billion into opening a casino in Japan if/when Japan legalizes gambling, (which it is expected to do in the near future). Ho has indicated that he believes that the potential gaming market in Japan is $20 billion.
A young, aggressive C.E.O. with a track record of success and powerful family connections rapidly expanding his company in the largest and fastest-growing gaming market in the world? That's a heck of a story! But in the world of Wall Street, a good story only gets you so far. So let's take a look at Melco's fundamentals compared to its peers. I put together this table of some of my favorite fundamental analysis metrics:
Melco's P/E ratio of 31 is not great, but it's in the neighborhood of the 27-29 P/E ratios of Wynn and Las Vegas Sands. Melco's strength, its growth forecast, is evident from its tiny PEG ratio, especially compared to its peers. The takeaway from these comparisons is that, while Melco may be slightly expensive based on its current earnings, it is not expensive at all when you account for its projected growth.
But before you go rushing to spend your life savings on Melco's stock tomorrow morning, let me give you the bad news: the stock has had a bumpy ride from $4 to $40. Back in 2011, after reaching $16, it plummeted back to $7 before continuing its ascent. Unfortunately, since Melco has made such a strong and high ascent over the past couple of years, I fear that a recent technical breakdown could very well lead to a larger short-term correction than the one shareholders have endured so far in 2014.
So what's the bottom line? I like the company, I like the CEO, and I like the stock in the long term. If you are an impatient trader or you can't stomach the kind of correction this stock saw in 2011, Melco is probably not the stock for you. However, if you believe, like I do, that the growth of China, Macau, and Melco Crown Entertainment is far from over (and you are patient enough to wait for it to happen), Melco just might be the stock for you!
