Melco Crown (Nasdaq: MPEL) has been the highest-flying gaming stock on the market over the past year. The stock is up 248% compared to 53.7% for Las Vegas Sands (NYSE: LVS), 14.3% for MGM Resorts (NYSE: MGM), and 77.5% for Wynn Resorts (Nasdaq: WYNN). But is this long run about to come to an end?
To stay on its hot path, Melco needs to prove a few things when it reports earnings Aug. 23.
Keep up with margins
Melco Crown has been well behind the operational-efficiency curve set by Las Vegas Sands and Wynn Resorts. While those two resorts are turning in excess of 30% of revenue into property EBITDA in Macau, Melco Crown was at a measly 15% last quarter.
There's really no excuse for Melco Crown to continue that kind of performance. The City of Dreams and Altira aren't new casinos, and they should be at tip-top operating condition.
Searching for growth
Las Vegas Sands, Wynn Resorts, and MGM Resorts all have new developments planned for the Cotai Strip in Macau to drive future growth. Melco Crown added a 60% stake in Macau Studio City in July, but it has the capacity to do much more. The company had $558.8 million in cash to end last quarter, only $1.6 billion in long-term debt, and lots of cash generation, so there's room for expansion.
So what's the plan for Melco Crown? With a 17.6 enterprise value / EBITDA ratio, the market has high expectations for growth already built in.
Giving back to shareholders
If Melco Crown isn't going to acquire another casino or build one itself, the company should start thinking about deleveraging or giving back to shareholders. Right now, Wynn Resorts is the only gaming company to pay a dividend, but Melco Crown could easily join in. I'm not expecting a move this quarter, but with plenty of cash and little capital expenditure coming, I'd like to know what the plan is.
Foolish bottom line
Unless Melco Crown starts improving EBITDA margins and finds new ways to grow, I think there are better deals in gaming. Shares are becoming extremely expensive and Melco Crown's hot streak could end if it doesn't have a near-perfect quarter.
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