Is Melco Crown Too Expensive Right Now?


Is Melco Crown the best hand, or is it overvalued?

Melco Crown (NASDAQ: MPEL  ) is one of the most profitable and rapidly growing casino companies in Macau. Along with competitors Las Vegas Sands (NYSE: LVS  )  and Wynn Resorts (NASDAQ: WYNN  ) , Melco Crown has gained massively from the increased visitation and revenue growth of the Macau gaming market over the last few years.

The stock looks like a good bet for its current strength and future growth prospects. However, one analyst from Barron's recently called it overvalued right now in comparison with the industry expected future P/E, rather than its current enterprise value/EBITDA.


A quick valuation lesson: The two main quick valuation metrics, price to earnings, or P/E, and enterprise value/EBITDA, differ in that EV/EBITDA calculates earnings before interest, tax, depreciation, and amortization (the meaning of the acronym EBITDA), whereas price to earnings is calculated after accounting for the ...ITDA part. This means that the company's level of interest bearing debt expense, amount liable for taxes on income, etc. will alter how each of these two ratios value the company. Back to the story...


The analyst took the forward looking P/E valuation approach and concluded that Melco Crown is expensive now. Melco Crown's current enterprise value to EBITDA of 13 times looks standard in the industry. However, the stock's P/E ratio of 17.1 times projected 2015 earnings is above the industry average of 14.8 times 2015 earnings. Because interest expenses coming from the debt it took on to develop new casinos will alter Melco Crown's overall value, future P/E does seem to provide a better analysis here than EV/EBITDA. While Las Vegas Sands and Wynn Resorts are both building new casinos with debt financing as well, they will spend less than 5% of their EBITDAs on interest expense on average, whereas Melco Crown will pay as much as 11%.

Melco Crown's CEO Lawrence Ho continues to lead the company as it grows. Photo: Bloomberg

The forward P/E isn't low, but...
Melco Crown has proven its ability in Macau with City of Dreams in Macau's main Cotai Strip and Altira Macau in nearby Taipa. These casinos did very well for the company in the first quarter of this year, which drove the company's revenue up 19% over the first quarter of 2013.

Melco Crown's EBITDA jumped 31% for the same period, which was driven mainly by an increased focus on mass-market revenue. Analysts at Deutsche Bank and Citigroup agree that Melco Crown has very good prospects for continued growth and profit expansion in 2014 and beyond, possibly the best prospects in the industry.

And what is this development that will drive future value?
Melco Crown's Studio City casino is coming soon. This integrated resort with a cinematic theme on the Cotai strip is set to be better than anything Melco Crown has produced yet, with 500 gaming tables, more than 1,500 slot machines, a five-star hotel, shopping mall, and more. Analysts at both Citigroup and Deutsche Bank have said that Studio City will be the "best situated" resort on the Cotai strip, as it will be directly adjacent to the Lotus Bridge that connects the strip to mainland China and a proposed stop for the new intercity light rail coming next year.

The Parisian promises to be an impressive resort with a 50% scaled Eiffel Tower. Photo: Las Vegas Sands

But competition is coming from other major players
Las Vegas Sands has been aggressively growing in Macau as well, and its newest resort on the strip will open at around the same time as Studio City. Sands is now developing The Parisian, which will open in 2015 as well, just across the strip. This resort will be the biggest of the new resorts coming to Cotai, at least in terms of the number of guests it can hold, with over 3,000 hotel rooms and suites, around 450 table games, 2,500 slots, a retail mall, and a replica of the Eiffel Tower at 50% scale.

CEO Steve Wynn introduces the vision for the new resort on the Cotai strip back in 2012. Photo: Reuters

Wynn Resorts, not to be left out, also has a new casino resort coming to the Cotai strip in the next 18 months. The $4 billion Wynn Palace on Cotai has an expected opening date in 2016. With a 1,700-room hotel, a performance lake, and much more, this will surely be a strong competitor to Melco Crown in Macau.

Foolish investment takeaway
Melco Crown has been a great investment for gaming investors over the last few years. The current stock price near $32 seems to be a discount, especially with mean and median analyst targets both near $47. However, the forward-looking P/E analysis cannot be ignored, and shows that Melco Crown might be more expensive for its future prospects than rivals Las Vegas Sands and Wynn Resorts. For Foolish investors who are looking for the long-term play with the best growth prospects for the best value, a bet on Melco Crown will be a bet that the company can pull off future growth that will prove its value.

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