In today’s Daily Alert, Cabot Stock of the Month Editor Timothy Lutts sees big opportunity in this Chinese casino stock.
“Just as Las Vegas boomed years ago, Macau is booming today for the same reason; it’s the only place in China where gambling is legal! All the big names in the industry are there, including Las Vegas Sands, Wynn Resorts and MGM Resorts, and Melco Crown (MPEL) is thriving right along with them.
“The big driver of revenue for Melco is its City of Dreams resort casino complex, a massive conglomeration of casinos, hotels, theaters, 20 restaurants and bars, 175,000 square feet of high-end shopping venues and, of course, 550 gambling tables and 1,500 gaming machines. This partially completed development contributes almost two-thirds of Melco’s revenue, with the Altira Macau kicking in just under a third. Smaller venues like the company’s Mocha Clubs, aimed at casual day-trippers, make up the rest.
“And here’s an amazing statistic. Revenues from rooms, food and beverage, entertainment and retail operations account for just 7% of Melco’s revenues. The casinos pull in 93%, and that’s a very profitable business. In fact, after-tax profit margins hit 10% in 2011 and have managed to stay above that level in almost every quarter since. And City of Dreams is not yet finished! The plans say the complex will be complete in 2015, much earlier than rival developments. As the Chinese economy revives, there’s little doubt revenues will continue to increase.
“Melco has grown revenues every year since it was founded, and it’s grown earnings steadily since turning profitable in 2011. Looking ahead, analysts are expecting 2013 to bring 28% earnings growth and 2014 to bring 25% earnings growth. Those are impressive numbers, but I think Melco is likely to do better, not least because of this week’s news that Macau’s casino revenues in March (through Sunday) were up 29.5% from last year! Las Vegas grew strongly for decades as it was built out, and I think Macau will do the same. The area is likely on the 3rd or 4th inning of a long growth run.
“Turning to the stock’s history, MPEL came public at the end 2006, trading as high as 23.55 on its very first day of trading, and then entered into a downtrend that accelerated with the global bear market, bottoming at 2 in late 2008. Since then, it’s been climbing back up. Intellectually, it’s interesting to know that the stock is nearing its old high, but practically, the fact that it was more than six years ago means there’s little significance to the level.
“The reason I like MPEL now is that from the start of February, MPEL based between 20 and 21, with an interruption to shake out weak hands on a dip to 18. But last week it broke out of that base, and it’s now put together six up days, and the odds are that it will go higher still. I recommend buying now.”
—Timothy Lutts, Cabot Stock of the Month, March 26, 2013