Take a Gamble With This Chinese Casino Company
Soroush is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Whether it’s Texas Hold-Em, Blackjack, or Baccarat, casinos allow their customers to gamble in nearly every way imaginable. Understandably, the stock market can also provide card sharks with another outlet for profit potential, and iconic investors like Warren Buffett and George Soros have proven that the market odds can be turned in your favor, for lack of a better pun. While the sheer size of these money managers (here’s our Top 10) may seem intimidating, it is possible for anyone to outperform general index funds, provided they perform adequate research.
Buffett once said, “never invest in a business you can’t understand,” which essentially means that it is crucial to know the ins and outs of a company before investing in it. It is this fundamental belief that has helped the Oracle turn Berkshire Hathaway into a multi-billion dollar behemoth (as discussed here), and it can also boost your portfolio. Below is one particular Chinese casino company that has the attractive combination of high growth at a cheap price; investing in it may yield a better return than any card game ever could.
Melco Crown Entertainment (NASDAQ: MPEL)
With a market capitalization of $6 billion, Melco Crown is not the largest casino company trading on American exchanges, though it is the only one focused entirely on the Chinese gambling industry. Operating exclusively in the country’s Macau region, Melco Crown has grown its revenues by nearly 40% a year post-recession, more than the Macanese (32.0%), and global (7.9%) casino industry averages.
Moreover, this top-line expansion is superior to the likes of Las Vegas Sands (NYSE: LVS) at 28.9%, Wynn Resorts (NASDAQ: WYNN) at 20.8%, MGM Resorts (NYSE: MGM) at 2.9%, and Caesars Entertainment (NASDAQ: CZR) at -4.5%. Even more impressive is the company’s bottom line, which is expected to grow by 19.1% over the next two years; with the Street expecting MPEL to report a year’s end EPS of $0.74, while improving this to $0.83 by the end of 2013. Considering the fact that Melco Crown was breaking even just two years ago, it is quite an achievement to be flirting with these estimates.
Despite this growth, shares of MPEL are trading at Price-to-Earnings (13.6X) and Price-to-Sales (1.3X) ratios below LVS (21.3X, 2.9X) and WYNN (18.5X, 1.7X). Moreover, its PEG ratio is a paltry 0.4; typically any figure below 1.0 signals undervaluation. In the 16 months leading up to Melco Crown’s Q1 earnings release (reported on May 9th), the company’s bottom line had historically traded at a 28% premium to those of the S&P 500. In the time since, they are trading at a 7% discount.
From a cash flow standpoint, Melco has seen its operating (85.3%) and free (273.5%) cash hoards grow at impressive rates over the past year. Despite this expansion, the company sports a Price-to-Cash Flow ratio (7.5X) below LVS (10.3X), WYNN (7.7X), and CZR (10.3X). When the PCFG ratio (0.2) is computed, which is similar to the PEG, this undervaluation looks to be even more prominent.
Thus, it appears that the markets have not fully accounted for the company’s growth prospects, likely due an economic slowdown that has even begun to affect the Middle Kingdom. Interestingly, analysts still expect the Macau gambling industry to expand at annualized rate of 18%, so it’s not all doom and gloom going forward. Various transportation projects are also expected to reduce travel time to Macau nearly eightfold by 2015, which include a new ferry service, high-speed rail, and the Hong Kong-Zhuhai-Macau bridge network. With discretionary spending rates at around half of the U.S., it looks as if gambling may be the Chinese economy’s ace in the hole, so to speak.
WealthLift’s Sentiment Index rates Melco Crown as a strong buy, with the majority of the community’s users placing an “overperform” rating on the stock. If the company can meet the Street’s earnings expectations by the end of this year, fairly valued shares of MPEL can eclipse $14; they currently trade around $10 a share.
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Fool blogger Jake Mann doesn't own shares in any of the companies mentioned in this article. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.