Melco Crown Is Not Just A Play On Macau

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The Philippines is looking to be the next hot spot for gamblers. Melco Crown (NASDAQ: MPEL) is one of only four gaming companies with a license to operate in the Philippines. The company has a joint venture to develop a 967-room, 242-table gaming resort that will be completed in 2014 called the Belle Grande Manila Bay. The best part about this venture is that a $337 million stock sale will fund much of Melco Crown's contribution.

Asia growth

Melco Crown remains well-positioned in Asia. Unlike Las Vegas Sands (NYSE: LVS), Wynn Resorts (NASDAQ: WYNN), or MGM Resorts (NYSE: MGM), Melco Crown is a pure-play on the fast-growing Asian market. Melco Crown is not exposed to the much-weaker Las Vegas market. Even Steve Wynn has publicly said that his company is now a Chinese company and no longer a Las Vegas company. The operations in Macau and Asia are the profit centers for these companies and offset the weaknesses in the U.S. market.

In Macau, Melco Crown operates two casinos and is building a third on the Cotai Strip near the Lotus Bridge. Its City of Dreams on the Cotai Strip was the best-performing resort in Macau in the last quarter. The two main mega-resorts on the Cotai Strip are Melco's City of Dreams and the Venetian Macau, owned by Las Vegas Sands. Melco's other property is the Altira Macau, located on the northern side of Macau's Taipa Island.

Besides the upcoming opening of the casino in Manila, Melco Crown is also building a new resort on the Cotai Strip called Studio City. Studio City will be unlike anything currently in the Macau market. The new resort will have a cinematic theme. It will also have one of only three casino stops on the Macau Light Rail system.


In looking at the fundamentals of Melco Crown, the stock looks very attractive, even after rising almost 85% in the past year. The company has a current market cap of $12.74 billion. On the balance sheet, there's only $2.96 billion in debt, and there's $1.41 billion in cash to offset that. Considering that the company is slated to open two new casinos within the next three years, the balance sheet is not too leveraged. With existing operations and two new casinos in development, by 2016 revenue could double to $8 billion. The growth for Melco Crown is phenomenal and the stock remains attractive relative to the potential.


<table> <tbody> <tr> <td> </td> <td> <p>Melco Crown</p> </td> <td> <p>Las Vegas Sands</p> </td> <td> <p>MGM</p> </td> <td> <p>Wynn</p> </td> </tr> <tr> <td> <p>Market Cap</p> </td> <td> <p>$12.74 billion</p> </td> <td> <p>$47.38 billion</p> </td> <td> <p>$7.31 billion</p> </td> <td> <p>$13.82 billion</p> </td> </tr> <tr> <td> <p>Revenue</p> </td> <td> <p>$4.20 billion</p> </td> <td> <p>$11.67 billion</p> </td> <td> <p>$8.87 billion</p> </td> <td> <p>$5.22 billion</p> </td> </tr> <tr> <td> <p>Y/Y Rev Growth</p> </td> <td> <p>0.12</p> </td> <td> <p>0.20</p> </td> <td> <p>0.03</p> </td> <td> <p>0.05</p> </td> </tr> <tr> <td> <p>EBITDA</p> </td> <td> <p>$916.27 million</p> </td> <td> <p>$3.53 billion</p> </td> <td> <p>$1.82 billion</p> </td> <td> <p>$1.52 billion</p> </td> </tr> <tr> <td> <p>Net Income</p> </td> <td> <p>$348.89 million</p> </td> <td> <p>$1.60 billion</p> </td> <td> <p>-$1.54 billion</p> </td> <td> <p>$564.43 million</p> </td> </tr> <tr> <td> <p>Operating Margin</p> </td> <td> <p>0.13</p> </td> <td> <p>0.22</p> </td> <td> <p>0.10</p> </td> <td> <p>0.22</p> </td> </tr> <tr> <td> <p>P/E</p> </td> <td> <p>36.83</p> </td> <td> <p>29.79</p> </td> <td> <p>N/A</p> </td> <td> <p>24.67</p> </td> </tr> <tr> <td> <p>PEG Ratio</p> </td> <td> <p>1.00</p> </td> <td> <p>1.50</p> </td> <td> <p>N/A</p> </td> <td> <p>1.90</p> </td> </tr> </tbody> </table>

In comparing these different gaming stocks, we see that Melco Crown has the second-best quarterly revenue growth after Las Vegas Sands. Melco Crown has the third-best operating margin among the group. Even thou Melco Crown has the highest P/E among the group, it has the lowest PEG ratio. This is likely due to the company's growth potential with its two upcoming new casinos.

Las Vegas Sands is the most valuable casino company in the world. It owns prime properties in Macau and Las Vegas and is one of only two casinos in Singapore. The biggest potential for Las Vegas Sands' shareholders is the company's plan to build a EuroVegas in Madrid, Spain. The first phase won't be complete until 2017, but the potential is huge for Las Vegas Sands, as Spain is a popular vacation destination for Europeans.

MGM is probably the most undervalued of the casino stocks. The company has too much debt that it undertook before the recession hit. MGM has slowly been working to improve operations and pay down debt. The good news is the company's stake in MGM China is doing very well. Analysts at Sterne Agee have valued MGM's stake in MGM China at $14. With MGM stock trading just above $15, you're getting all of its Las Vegas operations practically free.

Wynn Resorts is run by industry legend, Steve Wynn, and he owns a 9% stake. The company owns some of the premier properties in Las Vegas and Macau under its Wynn and Encore brands. Wynn's focus is on the high-end luxury segment, which targets VIP customers. Wynn Resorts gets 70% of its revenue from Macau and only 30% from its Las Vegas properties.

All three competitors to Melco Crown are further investing in Macau and are set to open new casinos in the next few years. MGM China is building a new $2.5 billion resort in Macau on the Cotai Strip. Wynn's project on the Cotai Strip is expected to be completed by Chinese New Year 2016. Las Vegas Sands is expanding its Cotai Central with the addition of hotel brands Conrad, Sheraton, and Holiday Inn. Las Vegas Sands is considered to be the single largest investor in China.

The hedge fund trade

Among the hedge fund crowd, Christian Leone's Luxor Capital Group has the largest stake with almost 6.2 million shares, worth almost $145 million. Following is Rob Citrone's Discovery Capital Management with over 4.1 million shares, worth over $96 million, and Emerging Sovereign Group with over 3.3 million shares, worth almost $79 million. Among the notable newcomers to the stock are billionaire Louis Bacon's Moore Capital Management with a $58.4 million call position.

Foolish assessment

Melco Crown is a pure-play on casino growth in the Asia-Pacific region. For this reason, I see it as the best casino stock for continued growth. The Chinese have an insatiable appetite for gambling, and I see Melco Crown being a prime beneficiary of this trend.

Melco Crown is often a forgotten company in gaming, but it has tremendous upside from Studio City and its partnership in the Philippines, which could more than double the company's revenue base. This being a more speculative investment, is it worth the risk for smaller investors? The Motley Fool answers this question and more in our most in-depth Melco Crown research available for smart investors like you. Thousands have already claimed their own premium ticker coverage, and you can gain instant access to your own by clicking here now.

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