Is Melco Crown a Bargain Here?

With shares of Melco Crown Entertainment Limited (NASDAQ:MPEL) trading at around $19.42, is GNW an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

C = Catalyst for the Stock’s Movement

Melco Crown has found itself in the middle of a lot of news and drama over the past few days. A London-based newspaper recently reported that the Chinese government will be cutting down on corruption. This supposedly includes junkets linked to organized crime. Since the majority of revenue for Macau casinos comes for VIP junkets, this has the potential to significantly reduce revenue.

However, there are two reasons this news is largely insignificant. One, the Chinese government has already indicated that it will not make any policy changes towards Macau. Two, China would only be shooting itself in the foot at a time when its economy is on shaky ground. Is it possible that organized crime is tied to the casinos in Macau? Of course. Will it have any impact on this business or its stock price? Not likely — at least not for the foreseeable future.

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Removing the negative hype and drama, we’ve got strong net income, which came in at $108 million for the quarter, slightly higher than $107.5 million in the year-ago period. Revenue increased 9.3 percent to $1.1 billion, also beating analyst expectations. FY2012 EPS came in at $0.76, which was a substantial improvement over EPS of $0.55 in 2011. The strong 2012 results were partially due to a significant increase in table game volumes, blended hold percentages, and increased volume in gaming machines. Another plus is that there has been a big jump in mass market play on the Cotai Strip.

Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Melco Crown is normal. It’s also stronger than the debt-to-equity ratios for competitors Las Vegas Sands Corp. (NYSE:LVS) and MGM Resorts International (NYSE:MGM).

Debt-To-Equity

Cash

Long-Term Debt

MPEL

0.67

$1.74 Billion

$2.37 Billion

LVS

0.90

$3.75 Billion

$9.50 Billion

MGM

1.49

$2.56 Billion

$13.83 Billion

 

T = Technicals on the Stock Chart Are Strong    

Melco Crown has outperformed its competitors over the past three years. Las Vegas Sands is the only company of the three that offers yield, which is currently 1.80 percent.

1 Month

Year-To-Date

1 Year

3 Year

MPEL

6.70%

15.32%

66.55%

451.70%

LVS

6.07%

17.63%

14.64%

275.70%

MGM

2.77%

11.60%

-7.35%

18.74%

 

At $19.42, Melco Crown is currently trading above all its averages.

50-Day SMA

17.67

100-Day SMA

15.72

200-Day SMA

13.80

 

E = Earnings Have Been Improving           

Earnings and revenue have been improving over the past three years.

2008

2009

2010

2011

2012

Revenue ($)in billions

1.42

1.33

2.64

3.83

4.10

Diluted EPS ($)

-0.01

-0.63

-0.02

0.55

0.76

 

We already know what happened this quarter. Now let’s take a look at previous quarters.

9/2011

12/2011

3/2012

6/2012

9/2012

Revenue ($)in billions

1.06

1.01

1.06

938.51M

1.01

Diluted EPS ($)

0.21

0.20

0.22

0.15

0.19

 

T = Trends Might Support the Industry

On the positive side, mass market play in Macau, and especially on the Cotai Strip, has been improving over the past year. This has the potential to lead to increased revenue for all casinos situated in Macau. On the negative side, there are many questions constantly being raised about the true underlying status of the Chinese economy. Then again, the same can be said for the United States.

Conclusion

Melco Crown has shown solid top-line growth through the years, which is more important than anything else. At the same time, the stock’s run-up has been substantial. Many investors will worry that it’s too late, but the Forward P/E is 16.55, and until the dam breaks, the trend is your friend. It also helps that the balance sheet is in decent shape, which can’t be said for all players in this industry.

For now, Melco Crown is an OUTPERFORM.

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