Take the Long View on Melco

Melco said Tuesday that about 26 VIP tables were open at Crown Macau this weekend, compared to the 80 VIP tables that will eventually fill the casino in four weeks. The company also said that hotel rooms at the property won't be fully operating until July.

While the VIP and hotel issues are ultimately short-term blips, investors right now don't have much to grab onto for comfort. Casino revenue won't be recorded until the next quarter, and management refuses to give forward guidance.

However, if you dig into the first-quarter earnings release and the call, there were several positives for Melco. The company's average net win per gaming machine at its Mocha Clubs rose 26% in the quarter from a year ago. Mocha Clubs offer video slots and electronic table games in café-like settings in Macau. This growth rate shows slots demand should be impressive at the company's full-fledged casinos.

Another good sign: Melco said it has committed to building a second condo tower at its next casino project, City of Dreams, which is planned to open in late 2008. This new tower will add 380 units, bringing the grand total at the project to 680 condos. Given the roaring Chinese stock market and growing wealth in the region, sales should be brisk.

Melco also said it would be willing to sacrifice planned restaurant space at the Crown property to build out a larger casino floor if demand calls for it. This could substantially boost the cash flow at the property.

Investors tired of looking at the red in Melco's stock should remember that casino stocks tend to sell off around new property openings. Wynn's stock saw major volatility in the timeframe before and after the company opened its Macau property in September 2006. The same can be said for Station Casinos'(STN) stock when the company opened Red Rock Casino in Las Vegas in April of last year.

Melco should eventually grab at least $650 million of earnings before interest, taxes, depreciation and amortization in 2010 when it three casinos are fully up and running.

Assuming $1 billion of condo asset sales, my valuation model says the stock is worth at least $20.

Bricks and Mortar Portfolio A look at how Nicholas Yulico's picks have performed.
	rating date	price at rating	rating	current price*	return**
Brookfield Properties (BPO)	1/23/2007	$43	Own	40.20	-6.5%
Global Real Estate ETF (RWX)	1/23/2007	$64	Own	70.40	10%
Ryland (RYL)	1/23/2007	$56	Flag	42.84	23.5%
Trump (TRMP)	1/23/2007	$17.50	Flag	13.56	22.5%
Penn National (PENN)	2/6/2007	$45.56	Own	49.66	9%
Hilton (HLT)	3/2/2007	$34.69	Own	34.62	-0.2%
Melco (MPEL)	3/12/2007	$15.46	Own	14.52	-6.1%
Home Solutions of America (HSOA)	4/24/2007	$4.98	Flag	5.70	-14.5%
*(5/15/07 closing price) **For "flagged" stocks, a drop in price is tracked as a positive for the portfolio, and a rise in price is a negative.

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