Melco Crown Entertainment Ltd (ADR) (MPEL): Why Buyers Should Beware

Melco Crown Entertainment Ltd (ADR) (MPEL) is making progress in living up to the lofty expectations investors have set over the stock’s recent run-up. First-quarter earnings released this morning showed an 11% increase in revenue during the first quarter to $1.14 billion and a 13% increase in EBITDA to $242.5 million.

It’s no surprise that City of Dreams continues to drive results. Revenue at the resort jumped 16.6% during the quarter to $836 million, and EBITDA was up 24.7% to $246.9 million. This slightly outperformed The Venetian Macau, Las Vegas Sands Corp. (NYSE:LVS)‘s  flagship property on Cotai.

Cotai continues to be the growth engine of Macau. The Macau Peninsula, where Wynn Resorts, Limited (NASDAQ:WYNN) and MGM Resorts International (NYSE:MGM) are located, have been holding steady but the growth is on Cotai, and that’s why investors are willing to pay a premium for Melco Crown Entertainment Ltd (ADR) (NASDAQ:MPEL) and Las Vegas Sands.

Resort Location Y/Y Revenue Growth Y/Y EBITDA Growth
City of Dreams Cotai 16.6% 24.7%
Altira Taipa 1.6% -27.2%
The Venetian Macau Cotai 12.9% 23.6%
Wynn Macau Macau Peninsula 4.4% 14.1%

Source: Company earnings releases.

Strong rolling chip growth of 24% drove the results although a hold percentage of 2.7%, at the low end of the 2.7% to 3% range, held back even better results. It’s clear that Melco is taking share from Wynn and even MGM Resorts International (NYSE:MGM) and right now it’s even outperforming The Venetian Macau on Cotai.

Future growth
Melco Crown Entertainment (MPEL), Brian Kelly Asian Century QuestMelco Crown Entertainment Ltd (ADR) (NASDAQ:MPEL) has two major projects that mark the next phase of growth. On Cotai it is building Studio City, which will probably open in 2016. It’s still unclear if the resort will be allowed table games, but Melco Crown is certainly counting on it. The resort will be at the south end of the Cotai Strip and will come online as The Parisian from Las Vegas Sands Corp. (NYSE:LVS), MGM China’s resort, and a Wynn resort are finished. This is the biggest potential growth driver the company has in the future.

In Manila, the company has a joint venture that will open a 967 room, 242-table game resort in 2014. It’s still unclear how much this will add to profitability, but Melco Crown Entertainment Ltd (ADR) (NASDAQ:MPEL) hasn’t had to put a lot of its own cash into the project after a $325 million stock sale in the Philippines.

Buyer beware
The only word of caution for Melco Crown investors is that you’re paying a steep price for the company today. Melco’s enterprise value/EBITDA is 15.4, at the tops of the industry. This is by no means a value and Melco Crown Entertainment Ltd (ADR) (NASDAQ:MPEL) will have to perform flawlessly to live up to priced-in expectations. This was a very nice quarter, but I don’t think the stock is a buy given the price.

The article City of Dreams Powers Melco Crown originally appeared on and is written by Travis Hoium.

Fool contributor Travis Hoium manages an account that owns shares of Wynn Resorts. The Motley Fool has no position in any of the stocks mentioned.

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