Melco Crown: Gamble on Macau

This stock is a pure play on the 'Las Vegas' of China.

By TheStockAdvisors Apr 1, 2013 10:22AM

 Gambling CorbisBy Timothy Lutts, Cabot Stock of the Month

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 Entertainment (MPEL) -- our latest stock of the month pick -- 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 550 gambling tables and 1,500 gaming machines.

This partially completed development contributes almost two-thirds of Melco's revenue. 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.

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.

Technically, 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 it just broke out of that base, and the odds are that it will go higher still. I recommend buying now.

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