Melco Crown: Zacks’ Bear of the Day Play

The Macau gaming scene has seen a slow decline this year due to various factors affecting tourism and the Chinese economy. And this drop was mirrored in the shares of casino stocks like Wynn Resorts (WYNN – Analyst Report), Las Vegas Sands (LVS – Analyst Report), and Melco Crown Entertainment (MPEL – Snapshot Report) which have been in a steady decline of their own since March.

I know because I owned MPEL for a quick 10% trade from $40 to $44 in the first quarter as I followed some institutions who were accumulating shares. And as I watched it lose the 50-day moving average in mid-March, I kept looking for an opportunity to buy again.

Every dip of the falling knife looked tempting, but I realized I didn’t know enough about gaming stocks to take that gamble. And caution was the right stance as downward EPS revisions in June caused the stock to slip to a Zacks #4 Rank in July.

An Unlucky Quarter

Last week, Melco Crown posted disappointing second-quarter 2014 results, missing on both top and bottom lines. Adjusted earnings of 30 cents per share missed the Zacks Consensus Estimate of 37 cents by 18.9%. Further, earnings declined from the year-ago figure of 35 cents by 12.4%. The downside reflects lower-than-expected revenues.

In the quarter, net revenue declined 7.4% year over year to $1.20 billion and also missed the Zacks Consensus Estimate of $2.59 billion by 9.4% due to lower group-wide rolling chip revenues, partially offset by improved mass market table games revenues.

Less Time for Games

The downside in the numbers reflects slowdown in Macau gambling growth. High-stake gamblers have been curtailing spending amid a cooling Chinese economy.

Additionally, the slowdown comes in the wake of a nationwide crackdown on corruption in China that has compelled Macau officials to impose restrictions on VIP gamblers in order to stop billions of dollars from being siphoned off illegally from mainland China to Macau.

Bottom line: Downward EPS revisions have taken 2014 estimates in the past 60 days from $1.75 to $1.62 and 2015 projections down from $2.14 to $2.01. This caused the drop to a Zacks #5 Rank Strong Sell.

While these numbers still reflect 20% and 23% EPS growth respectively, until the Rank turns around, it’s probably best to roll the dice elsewhere because estimates could still be on a trajectory to fall further.

Kevin Cook is a Senior Stock Strategist for where he runs the Follow The Money Portfolio.

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