My Favorite Casino Stock Keeps Surging Higher

By David Sterman (StreetAuthority | Original Link)

“Let your winners ride.”

Stanley Ho

It’s a favourite maxim among gamblers, and also applies to a top-performing casino stock. You could give this game ago online at ว<--spch-->ธ<--spch-->เล<--spch-->นสล<--spch-->อต
? I’m sure you’ll have great fun! Only a few weeks ago now, it was announced that their monthly revenue figures from the world’s newest gambling mecca implies a robust year ahead and further upside forMelco Crown Entertainment (Nasdaq: MPEL).

I laid out the investment 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 buying opportunity.

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 here.

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 from critical mass. Las Vegas Sands’ (NYSE:LVS) 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 in revenues 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 Chinese economy.

Indeed, according to online casino news, the entire casino sector finished 2012 on a high note, 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 with so many people going to sites like instead, so growth will have to be on an organic basis).

Yet it’s the middle of the decade that has analysts focusing on the next big catalyst for Melco Crown. The company has been sharply boosting spending in recent quarters 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 in free cash flowin 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-term cash 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 share.

Analysts at Citigroup have a similar price 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 this business modelcomes to fruition.

Risks to Consider: As we saw in 2012, any concerns about economic growth in China will depress valuations for Macau casino stocks 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.

P.S. – When you get in on the ground floor of a promising new trend or technology, the profits that can follow can change your life forever. Andy Obermueller’s Game-Changing Stocks is entirely devoted to finding the next big, life-changing investing idea. See his latest report for more ground-breaking investment plays.

David Sterman has worked as an investment analyst for nearly two decades. He started his Wall Street career in equity research at Smith Barney, culminating in a position as … Read More

David Sterman does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in th

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