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Wall Street Loves Melco Crown Entertainment. Should You?

By Rich Duprey – Updated Apr 7, 2017 at 1:14PM

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Analysts are unanimously bullish, but do you agree with this Wall Street darling?

Despite all of Wall Street's conflict and contention, a fortunate few companies enjoy unanimous support among professional analysts. If the market's movers and shakers all believe these companies will beat the long-term averages, well, surely they will -- right?

Not so fast! With help from the 180,000 members of Motley Fool CAPS, we'll see whether these high-flying favorites deserve analysts' unwavering support.

Today we'll take a look at Chinese casino operator Melco Crown Entertainment (Nasdaq: MPEL), which operates two casinos and 2,100 gaming machines in the gambling oasis of Macau. Among the analysts that CAPS tracks, 10 have weighed in on Melco, and though the investor community isn't unanimously supportive, 96% of the 1,367 members registering their opinion agree it will go on to outperform the broad market averages.

Melco Crown Entertainment Snapshot

Market Cap $6.1 billion
Revenues, TTM $4.0 billion
1-Yr. Stock Return (7.8%)
Return on Investment 8.2%
Est. 5-Yr. EPS Growth 31.7%
Dividend and Yield N/A, N/A
Recent Price $11.49
No. of Analysts 10
CAPS Rating (out of 5) ****

Source: FinViz.com. TTM = trailing 12 months.

But just because Wall Street loves 'em doesn't mean you have to. Analyst sentiment is only just the jumping-off place for your own research.

Bet on it
Macau gaming revenue in August came close to breaking all-time records for a month as receipts jumped 5.5% from the year-ago period, hitting 26.14 billion patacas, or $3.27 billion, just shy of the biggest-haul-ever record of 26.85 billion patacas realized in October of last year.

Yet as robust as that was, it fell short of analyst expectations of 7% to 9% year-over-year growth. The month got off to a slow start, and though it picked up steam as the weeks progressed, the economic slowdown being felt in China is also impacting the gambling industry. Macau's second-quarter GDP experienced a sharp drop from the first, falling from 18.4% to 7.3%.

Laying the foundation for growth
Melco experienced a surprising 2% drop in revenues in the second quarter despite the strong showing by City of Dreams casino, which saw revenues rise 12.6%, generating a 22% jump in adjusted EBITDA. Rather, it was the poor showing of its operations at Altira Macau, which suffers from a poor setting on the northern end of Macau's Taipa Island -- which explains why Melco is so thankful the government granted it the necessary permits to restart construction on its Studio City casino in Cotai.

That promises to offer more access to gamblers coming to the island and is where its City of Dreams casino is located. Yet if the Cotai Strip is where the action is these days, then Las Vegas Sands (NYSE: LVS) is the high roller there, with three properties in the heart of the strip, and it recently announced the second phase of its expansion plans for Sands Cotai Central.

Both Wynn Resorts (Nasdaq: WYNN) and MGM Resorts (NYSE: MGM) put themselves at a disadvantage by not already having a presence there, and won't be entering the market for several years yet.

The risk for investors in Melco is its dependence on City of Dreams. As Macau goes, and specifically Cotai, so will go the gambling house. It is working to diversify its Asian assets by entering into a joint venture in the Philippines, but that project is a long way away from completion as the company only just signed a memorandum of agreement with its partner to develop it.

At less than 15 times earnings, it offers a discount to most of its rivals. Sands goes off at 24 times earnings, Caesars Entertainment (NYSE: CZR) is at 20 times, and Wynn is at 19. Factor in earnings growth prospects, however, and the picture improves dramatically, with Melco offering twice the potential of Sands, which itself seems to offer a monster opportunity.

Debate rages over whether China is in for a harsh landing, though I doubt even it can ignore the laws of economics for very long. Spending as it has, the bill will come due sooner or later. However, rated Melco Crown Entertainment to beat the Street going forward. While other casino operators may also offer compelling opportunities, tell me in the comments box below if you agree Melco is a good bet.

Agree to disagree
If you can't shake the feeling, though, that Las Vegas Sands offers better odds, then this brand-new premium report from the Motley Fool's top analysts is for you. It describes all the opportunities and risks facing the gambling giant, laid it out in plain English for you. The report even comes with a full year of updates. Click here to get started

Fool contributor Rich Duprey holds no position in any company mentioned. Click here to see his holdings and a short bio. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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Stocks Mentioned

Melco Resorts & Entertainment Limited Stock Quote
Melco Resorts & Entertainment Limited
MLCO
$6.87 (29.53%) $1.56
Wynn Resorts, Limited Stock Quote
Wynn Resorts, Limited
WYNN
$66.97 (12.27%) $7.32
MGM Resorts International Stock Quote
MGM Resorts International
MGM
$30.23 (0.60%) $0.18
Las Vegas Sands Stock Quote
Las Vegas Sands
LVS
$39.70 (11.91%) $4.22

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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