Melco Crown Has Sweet Dreams on the Cotai Strip


Melco Crown (NAS: MPEL) reported earnings yesterday, and like its Macau brethren, the numbers were impressive.

Revenue grew 67% from last year, to $960 million, exceeding overall growth in Macau, showing that Melco is taking market share. More impressively, adjusted EBITDA exploded from $73.4 million a year ago to $216.3 million. Revenue growth means nothing if you can't turn it into earnings.

I've been critical of Melco Crown's EBITDA margins compared with those of Las Vegas Sands (NYS: LVS) and Wynn Resorts (NAS: WYNN) , and we did see some improvement there. The numbers above show that EBITDA margin was 22.5%, still well below both Wynn and Sands, but it's improving. It's this margin, along with revenue growth, that investors need to watch closely.

Potential growth not all it's cracked up to be
Management is starting to talk a bit about Macau Studio City, a development on the Cotai Strip in which Melco Crown just purchased a 60% interest. Right now, the financial viability of the project depends on table games being added to the development, and approval is uncertain at this point.

Macau has put a cap on table games, and new developments are in limbo as a result. Studio City is ahead of Wynn's and MGM Resorts' (NYS: MGM) potential Cotai developments, but that doesn't mean we aren't still years away from an opening. And without table games, the project wouldn't be a growth driver for Melco.

What to do now
Melco Crown has fallen almost $2 since I asked if it was time to sell the stock, and at this price, there's more value in shares. The stock's current price has the company trading at an enterprise value/EBITDA ratio of 12.9, on par with Wynn and Las Vegas Sands.

The two things that will continue to drive Melco Crown's shares are EBITDA margin growth and Studio City. If margins improve and Studio City gets table games, shares could easily double. If margins continue to bounce around like they have in recent quarters, they could stagnate here.

Where do you think Melco Crown's shares are headed? Leave your thoughts in the comments section below.

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At the time thisarticle was published Fool contributor Travis Hoium does not currently have a position in any gaming stock. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings or follow his CAPS picks at TMFFlushDraw.Try any of our Foolish newsletter services free for 30 days. 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 Motley Fool has a disclosure policy.

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Originally published