Why Shares of Melco Crown Entertainment Ltd Tumbled 22% in September

The Chinese casino operator had another rough month, but there is reason to believe that streak could soon be ending.

Jeremy Bowman
Jeremy Bowman
Oct 6, 2015 at 4:13PM
Consumer Goods

What: Shares of Melco Crown Entertainment(NASDAQ:MLCO) took a hit last month, shedding 22% according to data from S&P Capital IQ. Shares of the casino operator dropped in the second half of the month as negativity surrounding Macau emerged, and high-risk stocks got hammered by the Fed's decision not to raise interest rates.

MPEL Chart

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So what: Several casino operators experienced sharp slides in September, and the Hong Kong-based Melco, which owns several properties in Macau as well as Manila, can usually be found among the group tracking with Macau results. 

In addition to concerns about falling Macau revenue, which dropped 33% in September, Fitch Ratings also lowered its full-year forecast for the enclave, projecting revenue will now fall 33% to 34% instead of just 29%. Making matters worse, Deutsche Bank reiterated a sell rating on Melco on Sept. 23, saying that a combination of economic weakness in China and a crackdown in corruption resulting from an embezzlement scandal has led to a pullback in spending from VIP gamblers.

Analysts believe it will be necessary for the Macau industry, Melco included, to transition from one led by VIP gamblers to more of a mass market.

Now what: Melco shares fell to nearly a three-year low last month, but things should be looking up in the near future. The ongoing challenges in Macau seem to have passed an inflection point, with the worst coming in February when revenue was down 48%. Fitch expects growth to be flat next year, meaning Melco's performance in the island territory should at least be stable next year. 

Meanwhile, its Filipino properties are performing well with expectations of 20% revenue growth in the region. Though earnings per share are expected to fall by more than half this year, analysts expect revenue to jump by 22% next year, with profit growth returning in large part due to the strength of the Philippines. Melco will continue to be a risky stock, but after a two-year slide, it appears to be reaching a bottom.