The Hottest Stock in Gambling

In November, I asked if Motley Fool Global Gains pick Melco Crown (Nasdaq: MPEL  ) was worth doubling down on? At the time, Las Vegas Sands (NYSE: LVS  ) was the hottest stock in gambling, but Melco looked like a stock that needed to play catch-up. A few readers thought I was a real fool for picking Melco, but I wasn't bluffing on this pick. How have casino stocks done since then?

Stock

Nov. 30, 2010

Jan. 14, 2011

Price Change

Melco Crown

$5.97

$7.55

26.5%

Las Vegas Sands

$50.08

$48.07

(4.0%)

Wynn Resorts

$101.10

$118.82

17.5%

So what is driving Melco Crown higher? There are three dynamics pushing this stock, and all of them should help Melco keep up its run into 2011.

  • Improving EBITDA margins: In the third quarter, EBITDA margin improved to 16.9% from 12% in the second quarter. This still lags behind the 31.3% margin of Las Vegas Sands, but Melco is catching up.
  • Prime property on the Cotai Strip: The city of dreams sits in the center of the Cotai Strip, and as the area is built out, the property will benefit from more visitors to the area.
  • Lower valuation: Melco has a 19.5 enterprise value/EBITDA ratio, lower than Las Vegas Sands (28.0) and only slightly above Wynn Resorts (18.3). The stock is catching up to competitors quickly, and as Singapore adds rapidly to Las Vegas Sands' EBITDA, that stock may look cheaper, but Melco isn't looking terribly expensive considering growth and margin improvement.

Las Vegas Sands has its own problems lately, losing sites 7 and 8 on the Cotai Strip. If the project goes up for bid, Melco is one of the few companies with the ability to bid on the project. Wynn Resorts already has its land on Cotai and is conservative enough to avoid biting off more than it can chew. MGM Resorts (NYSE: MGM  ) has a site in Cotai and a boatload of its own problems. Las Vegas Sands has projects at sites 5 and 6 being built now and another huge project in waiting on Site 3. For Melco shareholders, this is like owning a free call option on the Cotai Strip. If the company doesn't get the project, there's no loss; if it does get it, it's a huge win.

Do you think Melco Crown's stock will continue to outperform rivals? Leave your thoughts in the comments section below.

Interested in reading more about Melco Crown? Click here to add it to My Watchlist to find all of our Foolish analysis on this stock.

Check, call, or raise:

Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.

Melco Crown Entertainment is a Motley Fool Global Gains pick. Try any of our Foolish newsletter services 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 Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (8)

Comments from our Foolish Readers

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 January 18, 2011, at 3:53 PM, 6gunner wrote:

    I was part of a group that made the final 7 when these licenses were passed out. I know Macau well. Melco is well positioned because its property is the most lavish in Macau. And the most profitable part of Macau gaming is at the ultra high end. This is where Melco is the stongest and best positioned.

  • Report this Comment On January 18, 2011, at 6:20 PM, JF125780 wrote:

    LVS is by far the best stock to own of all the securities in the gamling sector.

    The only thing that's holding this stock back is the insiders selling hugh blocks of stock that was given to them. WHY?

    Are they planning on going private and want to buy the company for peanuts? Say in a year if the company is worth $300, and priced on the NYSE at $70, and they can steal it at $100 a share, by this type of manipulation, will they do it?

    Dan Kowkabany

  • Report this Comment On January 19, 2011, at 6:54 PM, BudSlattery wrote:

    MPEL is substantially owned by the Ho family and the Packer family from Austrailia.

    These are rich powerful people and they will do what is necessary to make MPEL a huge winner.

    I own the stock under 6 and expect it to run past 15 in the next 2 years.

  • Report this Comment On January 19, 2011, at 7:48 PM, TMFFlushDraw wrote:

    @JF125780

    I'm wondering how you think LVS is worth $300/share? That would put the enterprise value over $200 billion. The company is expected to have revenue of $8.6 billion in 2011. How could that valuation be justified?

    Travis Hoium

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