Anybody that has read one of the many, many, many, many articles I’ve written about Melco Crown Entertainment knows that it holds a special place in my heart. Today was a big day for the company, as it reported quarterly earnings of $0.33 per share on revenue of $1.2 billion. Despite the fact that these numbers slightly missed expectations, the stock has been beaten down so much already the past few months that I doubt these numbers alone would have had much of a negative effect on share price.
Bad-news bombshell
What does have a negative effect on share price is the word “indictment, ” as in
We received information today that, the Taipei District Prosecutors Office has indicted our Taiwan branch office and certain of its employees, for alleged violations of certain local banking and foreign exchange legislation.
I have ranted on and on both here and in my book about always having a plan and always staying prepared for what may come in the market. However, no matter how much you plan and how well-informed you may be, there will always be surprises. Legal troubles, product recalls, company firings, natural disasters… These things cannot be predicted, and yet they can be as important to the operations of a company as any other part of a company’s business model.
Today, (and I’m guessing yesterday too…) MPEL shareholders got the short end of the market unpredictability stick. As a shareholder, you are at the mercy of what the company reports, and there’s no way of knowing what’s going on with day-to-day operations.
Melco apologists will point to this statement that followed the indictment announcement in the earnings report:
We will defend vigorously any indictment brought against us, as based on Taiwan legal advice received, we believe our operations in Taiwan are in compliance with Taiwan laws.
“See!” the apologists will say loudly while invading your personal space, “They don’t even believe they did anything wrong!” But what the hell else are they supposed to say? Of course they will say that, and the fact of the matter is neither I nor any other shareholder knows if this was a misunderstanding, an isolated incident, or widespread internal corruption. There’s really no way to know. It’s part of the game of trading stocks. If you knew everything, making money in the stock market would be as simple as going to an ATM and withdrawing your retirement money.
You can’t plan for everything
Yeah, it sucks. It sucks because I’m a control freak and a perfectionist and there is an element of unfairness when something unpredictable happens like this. But shareholders shouldn’t feel bitter about this news. This particular market surprise turned out badly, but I don’t have to go back even a whole year to find the last time that the market provided some unexpected good news for one of my stocks.
On Feb. 25, RF Micro Devices jumped 21% in a single day on news of a merger with TriQuint Semiconductor. I liked RF Micro devices as a company enough to buy shares in January, but I can take zero credit for predicting that merger. Sometimes you just get lucky. Today, Melco shareholders got unlucky.
What’s the deal with Macau lately?
So what should Melco shareholders do now? First, let’s set the indictment aside and look at the numbers. The drop in MPEL share price today and yesterday (as I believe that the large plunge yesterday was likely due to a leak of the indictment news) is peanuts compared to the drop in share price since Melco hit an all-time high of $45 back in early March. In a nutshell, here’s the deal: growth in Macau is slowing. This is a wonderful, succinct article from Forbes explaining what is going on: http://www.forbes.com/sites/muhammadcohen/2014/08/04/macau-july-casino-revenue-falls-vips-blamed-investors-bail-this-time/
Year-over-year monthly casino revenue in Macau fell for two consecutive months in June and July. To put that in perspective (one of my favorite words when it comes to trading), June was the first year-over-year monthly drop in Macau gaming revenue in five years. And then it happened again in July. So what is going on here? Are the Chinese getting bored with gambling? It’s a little more complicated than that.
Unbelievably, over the past several years, two-thirds of Macau’s gaming revenue has come from high rollers that are funneled to Macau via VIP junket operators commissioned by Melco, Las Vegas Sands, Wynn, MGM, SMJ, and Galaxy Entertainment. While these high rollers might make up a small percentage of the total visitors coming to Macau, they are the ones spending (and losing) all of the money.
The recent problem in Macau seems to be stemming from a crackdown on some of these junket operations, particularly revolving around high rollers’ access to cash while in Macau. This article from the Washington Post describes the root of the problem:
Tourists from mainland China can legally bring 20,000 yuan ($3,200) into Macau and withdraw as much as 10,000 yuan a day at cash machines with each card they have.
To skirt the limits, visitors can buy goods at a pawnshop using debit cards such as UnionPay and trade them in for the local currency at the same store. Pawnshops also lend local currency to gamblers.
There seems to be some dispute as to whether or not the crackdown is genuine or all for political show, but either way the high rollers are backing off for the time being, as VIP revenue has fallen from about 66% of Macau gaming revenue to only about 60% as of late. Whether this is the beginning of a trend or just a temporary scare remains to be seen.
Technically speaking…
From a technical perspective, MPEL stock is looking horrendous. As you can see in the chart above, MPEL was down nearly 40% from it’s 2014 highs earlier today before a slight rebound. That’s a lot of pain for shareholders. However, I must once again invoke the power of perspective. Watch as I magically turn that 40% loss into a 13% gain… SHAZAM!
Of course $29 per share looks pitiful compared to $45 per share, but at this time only one year ago, MPEL was trading at $26 per share. In proper perspective, this recent fall is not nearly the death spiral that it may seem. However, MPEL does need to find a bottom soon, and from a technical perspective it looks like $25 might be that level based on the longer-term chart.
Back in April, when Melco was trading at about $37, I issued the following warning:
If you look at a longer-term chart of MPEL, you can see that the stock has had a bumpy ride from $4 to $40. Back in 2011, after reaching $16, MPEL then plummeted back to $7 before continuing its climb. That’s what I call volatility! Unfortunately, since MPEL has made such a strong and high ascent over the past few years, I fear that the recent technical breakdown could very well lead to a larger correction than the 25% correction shareholders have endured thus far in the past couple of months. So if you are an impatient trader or you can’t stomach the kind of correction this stock saw in 2011, MPEL is probably not the stock for you.
It’s been a rough couple of months for Melco shareholders, but a 40% drop in share price is far from unprecedented in the short history of this company.
What now?
At the end of the day, shareholders must ask themselves the following questions:
1. Do I believe that the indictment is an isolated incident or and indication of widespread criminal activity within the company?
2. Do I believe that the reasons I first bought shares of Melco (mine are here) still hold true, or have recent changes in circumstances nullified those reasons?
3. Do I believe that the recent drop in VIP revenue in Macau is due to a temporary scare from a government PR-stunt “crackdown” on junket operations, or is this the beginning of a trend in which high rollers will be finding other places to spend their money?
My answers to all of these questions should be obvious when I disclose that I haven’t sold a single share of MPEL today or in all of 2014. Not only that, but I’ve been examining the chart and crunching numbers all morning today trying to decide at what price I would be convinced to buy more shares of MPEL with that horde of cash I’m currently sitting on.
Either tomorrow or early next week I plan on writing a follow-up this post, so stay tuned!
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