Has Melco Crown Become the Perfect Stock?

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Every investor would love to stumble upon the perfect stock. But will you ever really find a stock that provides everything you could possibly want?

One thing's for sure: You'll never discover truly great investments unless you actively look for them. Let's discuss the ideal qualities of a perfect stock, then decide if Melco Crown (NAS: MPEL) fits the bill.

The quest for perfection
Stocks that look great based on one factor may prove horrible elsewhere, making due diligence a crucial part of your investing research. The best stocks excel in many different areas, including these important factors:

  • Growth. Expanding businesses show healthy revenue growth. While past growth is no guarantee that revenue will keep rising, it's certainly a better sign than a stagnant top line.
  • Margins. Higher sales mean nothing if a company can't produce profits from them. Strong margins ensure that company can turn revenue into profit.
  • Balance sheet. At debt-laden companies, banks and bondholders compete with shareholders for management's attention. Companies with strong balance sheets don't have to worry about the distraction of debt.
  • Money-making opportunities. Return on equity helps measure how well a company is finding opportunities to turn its resources into profitable business endeavors.
  • Valuation. You can't afford to pay too much for even the best companies. By using normalized figures, you can see how a stock's simple earnings multiple fits into a longer-term context.
  • Dividends. For tangible proof of profits, a check to shareholders every three months can't be beat. Companies with solid dividends and strong commitments to increasing payouts treat shareholders well.

With those factors in mind, let's take a closer look at Melco Crown.

Factor

What We Want to See

Actual

Pass or Fail?

Growth

5-Year Annual Revenue Growth > 15%

183.6%

Pass

 

1-Year Revenue Growth > 12%

60%

Pass

Margins

Gross Margin > 35%

66.6%

Pass

 

Net Margin > 15%

3.2%

Fail

Balance Sheet

Debt to Equity < 50%

93%

Fail

 

Current Ratio > 1.3

2.81

Pass

Opportunities

Return on Equity > 15%

4.2%

Fail

Valuation

Normalized P/E < 20

71.42

Fail

Dividends

Current Yield > 2%

0%

Fail

 

5-Year Dividend Growth > 10%

0%

Fail

    
 

Total Score

 

4 out of 10

Source: S&P Capital IQ. Total score = number of passes.

When we looked at Melco Crown last year, it only managed to score three points. Since then, the company has seen big improvements in margins and return on equity, although Melco has seen its balance sheet health deteriorate somewhat.

Melco pegs its huge revenue growth to the booming gaming market in Macau. The casino operator has thrived alongside Las Vegas Sands (NYS: LVS) , first at the tip of the Macau Peninsula and more recently on the newly developing Cotai Strip. With competitors Wynn Resorts (NAS: WYNN) and MGM Resorts (NYS: MGM) having been a bit slow to see the Cotai trend, Melco could retain a competitive advantage for some time.

What Melco gives you, though, is a much smaller play on the gaming trend. Sands, Wynn, and MGM all have massive operations in Las Vegas and elsewhere, which tend to water down the huge Asian growth that the gaming industry has seen. Melco represents the best pure-play investment on Macau.

Of course, that cuts both ways. With fears of a global slowdown centered on China, Melco's concentrated strategy could backfire. Just as local U.S. casino companies Penn National (NAS: PENN) and Boyd Gaming (NYS: BYD) have their fortunes tied to their local markets, problems in the Chinese economy could stunt Melco's prospects.

For now, though, Melco continues to enjoy strong growth. With a high valuation, no dividend, and still-mediocre net margins and returns on equity, though, Melco has a long way to go to reach perfection.

Keep searching
No stock is a sure thing, but some stocks are a lot closer to perfect than others. By looking for the perfect stock, you'll go a long way toward improving your investing prowess and learning how to separate the best investments from the rest.

Click hereto add Melco Crown to My Watchlist, which can find all of our Foolish analysis on it and all your other stocks.

Finding the perfect stock is only one piece of a successful investment strategy. Get the big picture by taking a look at our "13 Steps to Investing Foolishly."

At the time this article was published Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool has a disclosure policy.

Copyright © 1995 - 2011 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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