By now, many investors have heard about the massive gambling
mecca in the Chinese protectorate of Macau. Billions of dollars
have poured into the strip, creating a similar amount of profits
for investors. Yet investors may not have heard of the prologue
to this story. The "Macau story" is played out: growth has
sharply slowed and investment opportunities have dried up.
Or so the financial press would have you believe.
The truth is quite different. For far-sighted investors, a fresh
chance at upside has emerged, especially for my favorite Macau
Melco Crown Entertainment (Nasdaq:
. A nearly 40% plunge since early March, paired with a
still-robust growth outlook, means it's time to buy.
I first looked at Melco Crown four years ago and I encourage you
read what I wrote back then
before continuing. The expansion strategy laid out then exceeded
my wildest expectations. Shares went on to deliver a nearly
Maturing, not slowing
The era of rapid growth for Macanese casinos is nearing an end.
Chinese citizens -- especially the high-rollers -- are feeling
more circumspect these days, especially as the Chinese government
cracks down on corruption and conspicuous signs of wealth. It's
an issue for 2014, but longer-term, the Chinese economy will keep
minting new millionaires. And many of them will be leaving
mainland China -- where casinos are prohibited -- and hopping on
the boat for Macau. In effect, think of Macau as maturing, from a
phase of rapid growth to moderate growth.
Recent quarterly results gave investors a scare. Labor costs
unexpectedly surged, right at a time when the casino's hold rate
diminished, which is generally attributed to good luck by
gamblers. That led to a profit shortfall. Investors were also
concerned about a slowdown in gaming revenues across Macau,
though that now appears increasingly attributable to the World
Cup. Gaming activity has picked up in recent weeks, according to
For its part, MPEL still has ample room for growth in Macau and
elsewhere. Right now, the company is planning for the launch of a
new casino complex in the Philippines, known as Belle Grande. The
company is also still building a massive new complex on Macau,
known as Studio City, augmenting its existing City of Dreams
complex. Those new casino complexes set the stage for sales to
rise from around $5 billion this year, to roughly $8 billion by
2016, according to Merrill Lynch.
While shares are out of favor, management has decided to earmark
some if its cash towards a $500 million share buyback. "This is
in addition to commitment to a regular quarterly dividend payout
of 30% and potential for special dividends, both announced
earlier this year," said an UBS analyst.
Merrill Lynch has a $43.70 price target while UBS expects shares
to reach $43. Note that both of those price targets represent
more than 50% upside.
UBS extends the view of MPEL's growth out to 2018. By then, the
company is expected to generate $10.4 billion in sales, or
roughly twice its 2014 sales base. And by 2018, per share profits
are expected to exceed $3.50, while the dividend is expected to
approach $2. That's a 7% yield, in today's dollars.
Risks to Consider:
The greatest risk is that MPEL has not yet received a gaming
license for its new Macau casino, slated to open mid-2015. The
Chinese government tends to move slowly when reviewing license
applications, but has ultimately approved all of the company's
previous license requests.
Action to Take -->
The key takeaway for this stock is not just its growth strategy,
which should yield solid revenue gains. Once the business model
ripens, it's the level of profits on those sales that should
really get your attention. This is a company that is in the midst
of a $10 billion, decade-long capital plan, which should
eventually generate more than $2 billion in annual operating
profits. Don't let the broken stock chart fool you, Melco Crown
remains as one of the most compelling gaming and entertainment
stocks you can buy.
Melco Crown has a solid dividend yield and is
repurchasing shares... it's one step away from a phenomenal
"Total Yield" score.
My colleague Nathan Slaughter developed a way to find the most
stable, profitable companies in the world by looking at three key
metrics to produce a Total Yield. Since 1982, these dividend
payers returned an average of 15% per year. Last year, this group
more than doubled the S&P 500's return
To find out which companies have the best Total
Yield, click here.