"Let your winners ride."
stock . Recently announced monthlyrevenue figures from the
world's newest gambling mecca implies a robust year ahead and
Melco Crown Entertainment (Nasdaq: MPEL)
I laid out theinvestment case
for this stock in September 2010
, noting that Melco was the newest initiative from billionaire
Stanley Ho, the legendary Hong Kong mogul that owns some of the
world's top casinos.
I took a fresh look at Melco
roughly a year ago
and once again
this past summer
, concluding that a pullback below $12 a share was a clear
Thanks to newfound momentum at the gaming tables of Macau, along
with a series of upcoming catalysts, this stock now appears headed
into the $20s, perhaps yielding 50% or more in upside from
Now and later
Over the course of 2012, the major players in Macau built out their
hotel and casino complexes and now appear to be benefiting
fromcritical mass .
Las Vegas Sands' (
Sands Cotai Central and Venetian Macau casinos, along with Melco's
City of Dreams (COD) are all on the same block in the Cotai
district and now have a combined 8,000 hotel rooms. Gamblers have
started to migrate to that area, thanks to its convenience to
transit and hundreds of shops.
The strong traffic at Melco's COD complex likely fueled
an 8% spike inrevenues for the company in the fourth quarter,
according to Goldman Sachs (Consensus forecasts had been
anticipating flat growth in the fourth quarter). If Goldman Sachs'
analysts are correct, then that would be the strongest
year-over-year quarterly gain in 2012. Macau gambling revenues
slowed earlier in the year on the heels of a slowing Chineseeconomy
Indeed, the entire casino sector finished 2012 on a highnote ,
with December revenues spiking nearly 20% higher than the year-ago
monthly take, which should set the stage for solid 5% to 10%
revenue growth in 2013 as well, according to analysts (No new
casinos are slated to open, so growthwill have to be on an organic
Yet it's the middle of the decade that has analysts focusing on
the next bigcatalyst for Melco Crown. The company has been sharply
boosting spending in recentquarters in preparation of a launch for
a new casino -- Macau Studio City -- in 2014, and then the opening
of a new casino in the Philippines in 2015, which will instantly
become the largest in that country.
With plans to spend more than $2 billion to complete those two
construction projects, investors will need patience. Melco Crown
likely generated more than $2 billion infree cash flow in 2012, but
look for a similarly-sized free cash flow loss in 2013. Free cash
flow should be modestly negative in 2014, before spiking back to
2012 levels in 2015.
With such a muddled near-termcash flow picture in place, this is
a tricky stock to value. Goldman Sachs has refrained from valuing
the big 2014 and 2015 casino launches, and instead focused on
existing opened casinos and values this stock at $21.50 a
Analysts at Citigroup have a similarprice target and
methodology, but think that Macau Studio City will add an
additional $5 in value to this stock when it opens in 2014, and the
casino in the Philippines will add another $2 in value. In effect,
this stock may approach $30 a share once thisbusiness model comes
Risks to Consider:
As we saw in 2012, any concerns about economic growth in China
will depress valuations for Macau casinostocks as concerns rise
that gambling revenues will slump.
Action to Take -->
The Chinese middle class continues to expand at a solid pace, and
that trend is expected to remain in place for the rest of the
decade. With a strong predilection for gambling, Chinese consumers
should help fuel solid multi-year gains for Melco Crown.