Casino Stock Melco Crown Is About to Crap Out

Macau casino operators had a very strong first half in 2011 as net profits
tripled. Melco Crown Entertainment (NASDAQ: MPEL ) reported first half earnings
August 23 that were 273% higher. It sees further good news ahead. Analysts love
its stock. Eleven give it at least a "buy" rating and none believes it's a
"sell." But Melco Crown stock is off about 21% in the last month, showing
the the casino operator may not have a hand full of aces. Besides, when analysts
are this bullish, on MPEL stock its a sign to get nervous. Here are three
reasons why analysts are wrong and Melco Crown stock is about to crap out.
Mainland China Scrutiny Macau depends on the mainland for its very existence.
Approximately 31% of its casino revenue is from visiting Chinese government
officials or senior managers of state-run companies. Recent stock market unrest
has sent casino stocks tumbling as concerns about a global economic slowdown
have become very real. If China's economy hits the skids, there's no way
these high rollers are making the trek to the special administrative region and
making big bets. Recently, the mayor of a small town in China lost $12 million
at the tables, most of it government funds, and scrutiny has been focused on
MPEL as a result. The mayor went to prison for 20 years, and mainland China is
clearly concerned about future occurrences during an economic slowdown. Lack of
Diversification However, perhaps a bigger elephant in the room is China's
financial situation, which many believe is a house of cards on the verge of
collapse. If this happens, Melco Crown is going to wish it had a little more
diversification and Macau is going to rue the day it became so reliant on
gambling. Macau gets 40% of every gambling dollar generated at the 34 casinos in
its jurisdiction. In the first half of 2011, it brought in $6.2 billion ($15.5
billion multiplied by 40%) and looks to rake in another $7.4 billion in the
second half of the year. The 2011 estimate for gambling revenue in the region is
$34.1 billion, which is five to six times greater than the entire Las Vegas
strip.Analysts believe that Singapore, with just two resorts open, albeit large
ones, is now in second place ahead of Las Vegas. While business in Macau looks
very promising presently, the tide can turn very quickly. Melco Crown's three
casinos hold a 16% market share, third best in the region behind Galaxy
Entertainment Group at 19% and SJM Holdings at 28%. The remaining three players
include Wynn Resorts (NASDAQ: WYNN ), Las Vegas Sands (NYSE: LVS ) and MGM
Resorts (NYSE: MGM ). It's an extremely competitive field and Steve Wynn and
Sheldon Adelson don't like to lose. Melco Crown shareholders might want to
ponder the fact it generates 100% of its adjusted property EBITDA from its three
Macau casinos, which compares to 77% for Wynn Resorts and 57% for Las Vegas
Sands. Adelson's baby generates revenue from the top three gambling markets in
the world providing it with excellent diversification. If Macau falters, Las
Vegas Sands gets hurt but Melco Crown flirts with bankruptcy. MPEL Graham
Number is Ugly Some of you are probably familiar with the Graham number, the
quick calculation value icon Ben Graham used to weed out stocks. The simplest
version multiplies 22.5 by the trailing 12-month earnings per share and once
again by the trailing 12-month book value per share. The square root of that
number is the theoretical fair value. It's not perfect by any means but it
gives you a decent idea. In fairness, I'm not going to use Melco Crown's
trailing 12-month numbers, which aren't stellar. Instead, I'll take the
analyst's consensus for December 2012 of 52 cents and a trailing 12-month book
value per share that's inflated by 52% to reflect the increase in earnings.
I'm being generous on both fronts because I'm upping the earnings per share
figure by 32 cents and the book value per share by 52% when the real increase
will be around 10%. Doing so, I get a fair value of $9.33, far below its current
price of