Asian casino operator Melco Crown (MPEL) , run by Lawrence Ho, has had a steady recovery in the past month. Shares are up nearly 13% in a month after predictions from UBS and Telsey Advisoryindicate a sturdy start to July for Macau casinos.
With the company having missed Wall Street estimates for three out of four quarters, all eyes are on Melco. Macau casino operators have been under pressure with experts forecasting poor realizations amid distraction of the Euro 2016 soccer tournament and a low VIP win rate.
Even after the short-term perk-up, Melco shares are still down 14% year-to-date (YTD) after losing more than 30% in 2014 and 2015. The stock looks pricey compared to peers, and investors should exercise caution. We examine the stock's weaknesses. We also show you a safer way to make money in up or down markets, during bullish or bearish conditions.
Melco Crown Entertainment operates casino hotel Altira Macau, integrated urban casino resort City of Dreams, and electronic gaming machine operation Mocha Clubs. It also operates gaming resort Studio City and City of Dreams Manila. The most enticing draw for a prospective Melco investor was always Macau, the largest gaming market in the world.
Unfortunately, Macau is no longer making money. This is the bad news that has taken the wind out of Macau casino stocks: Wynn Macau, Sands China, MGM China, Galaxy Entertainment, SJM Holdings and Melco Crown.
The high-end customer market has shrunk in Macau. The region, for a long time, saw gambling revenue grow by the size of the Las Vegas Strip each year. Then, a series of government policies introduced by Beijing and Macau officials abruptly stopped the city's baccarat boom. Casino operators, with billions of dollars in investments, have been caught on the wrong foot. High rollers or VIP gambling revenue began tumbling in May 2014 as China's escalating anti-corruption campaign scared off the big fish. The controversial junket system also cracked due to aggressive lending.
Although casino operators won't admit it, the growing sense is Macau will probably never boom again. One month here, another there, but Macau revenues appear unstable. Additionally, there is a new supply of properties: Wynn Palace will open in early August, MGM Palace by the end of the first quarter of 2017, and Las Vegas Sands will open The Parisian early 2017.
Melco is not in a sweet spot. There is too much optimism on summer results and the major weakness seen in Macau's high-end VIP customer sector is hurting. With high roller revenue drying up, the price-conscious rising middle class in China and Asia are the only hope. After hitting peak annual sales of $5 billion in 2013, sales have petered off for Melco. Next year, revenue is projected to only grow by 2.8%. All those empty tables, slots machines, and hotels rooms are beginning to ask uncomfortable questions. The gaming market is shrinking and new competition will put further pressure on the bottom line.
With earnings per share of Melco Crown expected to grow at a snail's pace of 0.41% annually for next five years (vs. nearly 7% run rate in the previous half a decade), the writing is on the wall. At 31 times forward earnings, Melco shares are trading at an unjustified premium to Las Vegas Sands Corp. (20.1 times), Wynn Resorts (20.1 times) and MGM Resorts (21.2 times).
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This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.