What Happens in Macau, Stays in Macau

01/26/2012 9:00 am EST

Focus: GLOBAL

Nicholas Vardy

Editor, Bull Market Alert, The Alpha Investor Letter, and The Global Guru

If you’re looking for a stock with a lot of growth potential, look to this gaming stock with a strong presence in the Vegas of the East, writes Nicholas Vardy of Bull Market Alert.

Early January was a good time for the Bull Market Alert portfolio, as our position in Bank of Ireland (IRE) soared 16%. This jump is actually the first time that Bank of Ireland has traded above its 50-day moving average since early September, and indicates the kinds of gains that are possible with this kind of a position.

This Bull Market Alert pick focuses on “Asia’s Las Vegas” through Melco Crown Entertainment Limited (MPEL). Melco is an operator of casino gaming and entertainment resort facilities focused on the fast-growing Macau market—the only Chinese city in which casinos are legal.

And although I am skeptical of investing in Chinese state-owned companies, Melco is a privately owned company that is truly thriving in exploiting one of the biggest opportunities in Asia.

Macau became the world’s biggest gambling hub in 2006, overtaking the Las Vegas strip in terms of revenues that year. While Las Vegas still is struggling to get back on its feet in the aftermath of the Great Recession, 2011 gambling revenue in Macau rose a whopping 42% to a record $33.47 billion—a figure that is nearly five times greater than 2011 revenues at the Las Vegas strip.

Melco is one of six licensed Macau casino operators. But unlike its other competitors, 100% of Melco Crown’s revenues are derived from Macau.

Melco also is controlled by Lawrence Ho, a son of local tycoon Stanley Ho, and part of one of the region’s most powerful families. That makes Melco a local player with a leader who knows the rules of the game in a rough-and-tumble business environment.

In June 2011, Melco acquired a 60% interest in Macau Studio City, which is shaping up to be the premier gaming spot in Macau when it opens in three years, thanks to its location. The casino will be located right next to the Lotus Bridge immigration station, making it the first and most visible casino on “the strip.”

Melco stock was hit hard this past summer on fears of a dilution of existing shareholders to finance this major development. But with roughly $1 billion of cash in the bank, the company’s management has assured investors that Macau Studio City will be funded strictly out of cash and ongoing cash flow. Since then, Melco’s stock has been making a gradual recovery.

Recent financial results for Melco confirm its remarkable growth rate. For the nine months ending September 30, Melco reported net revenue of $2.8 billion. That’s a 90% increase in revenues compared the same period in 2010.

Net income hit $187.1 million. That equates to 35 cents per American Depository Receipt (ADS), compared to a net loss per ADS of 5 cents for the comparable period in 2010. When the company announces its next set of earnings on February 20, I expect earnings to hit 50 cents per ADS for all of 2011.

The recent pullback in the stock makes it a good time to buy Melco Crown Entertainment Limited at market today. Place your stop at $8.30. For even bigger potential gains, I recommend the July $11 call options, (MPEL120721C00011000).

In the interest of full disclosure, I also want you to know that I hold MPEL for my clients at Global Guru Capital.

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