Is Melco Crown the Perfect Stock?

Everyone would love to find the perfect stock. But will you ever really find a stock that gives you everything you could possibly want?

One thing's for sure: If you don't look, you'll never find truly great investments. So let's first take a look at what you'd want to see from a perfect stock, and then decide if Melco Crown Entertainment (Nasdaq: MPEL  ) fits the bill.

The quest for perfection
When you're looking for great stocks, you have to do your due diligence. It's not enough to rely on a single measure, because a stock that looks great based on one factor may turn out to be horrible in other ways. The best stocks, however, excel in many different areas, which all come together to make up a very attractive picture.

Some of the most basic yet important things to look for in a stock are:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales don't mean anything if a company can't turn them into profits. Strong margins ensure a company is able to turn revenue into profit.
  • Balance sheet. Debt-laden companies have banks and bondholders competing with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Companies need to be able to turn their resources into profitable business opportunities. Return on equity helps measure how well a company is finding those opportunities.
  • Valuation. You can't afford to pay too much for even the best companies. Earnings multiples are simple, but using normalized figures gives you a sense of how valuation fits into a longer-term context.
  • Dividends. Investors are demanding tangible proof of profits, and there's nothing more tangible than getting a check every three months. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Melco Crown.

Factor

What We Want to See

Actual

Pass or Fail?

Growth 5-Year Annual Revenue Growth > 15% 188.7% pass
  1-Year Revenue Growth > 12% 108.1% pass
Margins Gross Margin > 35% 18.9% fail
  Net Margin > 15% (8.4%) fail
Balance Sheet Debt to Equity < 50% 78.6% fail
  Current Ratio > 1.3 1.54 pass
Opportunities Return on Equity > 15% (7%) fail
Valuation Normalized P/E < 20 NM fail
Dividends Current Yield > 2% 0% fail
  5-Year Dividend Growth > 10% 0% fail
       
  Total Score   3 out of 10

Source: Capital IQ, a division of Standard and Poor's. NM = not meaningful; Melco Crown had a net loss during the period. Total score = number of passes.

Melco Crown comes in with a score of just 3. But even if it isn't perfect yet, many people see a lot of potential for the Hong Kong-based casino operator that's betting big on the new epicenter of global gaming activity.

Melco Crown is focused on Macau, the world's most popular gambling area right now. Supported by strong demand among Asian gamers, the big entertainment boom there has given big Las Vegas players Wynn Resorts (Nasdaq: WYNN  ) and MGM Resorts (NYSE: MGM  ) some relief from a dismal domestic performance during the recession.

The challenge, though, is that the entertainment world is always looking for the next hot thing, and Macau's prominence may not last long. Already, Las Vegas Sands (NYSE: LVS  ) has seen great success in its Singapore-based Marina Bay Sands development. Geographically, Singapore is in a position to get business not just from the red-hot Asian market, but also from Australia and even India. If Macau fades, then Melco Crown could go bust just as fast as it has grown in recent years.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate out the best investments from the rest.

Click here to add Melco Crown Entertainment to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned in this article. Melco Crown Entertainment is a Motley Fool Global Gains pick. Try any of our Foolish newsletters today, free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.


Read/Post Comments (1) | Recommend This Article (5)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 22, 2010, at 11:22 AM, MutualFundMonday wrote:

    No it's not.

    Why? MPEL is just like SJM in that they pay exorbitant junket fees to bring in business which punishes the bottom line.

    LVS is the best of breed. Low junket fees, high EBITDA margins, and only major casino (other than Galazy) to open 500 more tables in Macau in next 3 years (Macau has table cap until 2014 at the earliest), as well as the ability to open 750+ tables after 2014 on Lots 3, 7, 8. MGM and WYNN only have room to build 500 tables max on 1 lot while MPEL has no growth plans.

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