The gaming industry is fast-moving, and Melco Crown (MPEL +2.16%) can be extremely volatile on a day-to-day basis. So, to prepare you for investing in this stock, I've created a premium report with everything you need to know about Melco Crown. The company's opportunity, risks, and leadership are among the topics covered. Below is an excerpt from the report with the three key areas you must watch to have a profitable investment in Melco Crown.
The 3 areas you must watch
Gaming stocks can be extremely volatile, and investors need to keep a close eye on these key metrics when assessing Melco Crown.
1. Macau gaming growth
Macau gaming revenue has grown at an incredible pace since Las Vegas Sands opened the Sands Macau in 2004. From 2004 to 2011, gaming revenue grew at a compound rate of 30% annually, or more than sixfold in seven years. But 2012 has brought a big slowdown in growth. Through September, Macau has grown only 14.9% from a year earlier, and the pace of annual growth has declined each month. As growth slows, casinos compete harder for VIP clients and offer more kickbacks, which hurts the bottom line. If growth continues to slow or gaming revenue declines, it will be a warning sign for investors.
2. EBITDA margin
One of Melco Crown's flaws is that it sends less of each dollar of revenue to the bottom line than competitors. City of Dreams' EBITDA margin in the most recent quarter was 26.9% compared to margins of 35.3% at The Venetian Macau and 33.3% for Wynn Macau. The company has improved margins since City of Dreams opened, but this underperformance leaves profit on the table each quarter.
3. Developments at Studio City and Manila
So far, Melco Crown hasn't been approved for table games at Studio City, but if it is, the upside will be tremendous. Studio City is a premium location near one of the entry points from mainland China, and with table games, it could double the company's revenue. By the same token, investors need to watch developments in the Philippines. The company should have ironed out details of the agreement by now and we should hear what progress has been made in the third-quarter conference call.
If Macau continues to grow, margins continue to improve, and the company's two developments go forward as management plans, this stock could skyrocket over the next five years.
