Monday, October 4, 2010

3 Reasons to Sell Melco Crown Entertainment Today

By Dave Mock | More Articles

Acting on panic never helps investors, but it's still a good idea to question why you're really buying individual investments.

Consider Macau casino operator Melco Crown Entertainment (Nasdaq: MPEL). Though the Chinese gaming market continues to be hot, you'll find a few of the 1,293 Motley Fool CAPS members weighing in on the company offer reasons to be bearish.

Here at The Motley Fool, we like to consider both the good and bad sides of an investment, so in this article, so I'm highlighting three of the main bearish arguments on Melco Crown Entertainment today. Be sure to read the bullish side as well, and then weigh in with your own comments below or rate Melco Crown Entertainment inCAPS.                                          

1. Racking up losses
While U.S.-based casino operators like Pinnacle Entertainment (NYSE: PNK) and Isle of Capri Casinos (Nasdaq: ISLE) are still feeling the squeeze of the U.S. economy, one would think that the amazing growth in the strong Macau market would have Melco Crown swimming in cash, but investors are hard-pressed to find a quarterly profit at any time in the recent past. And with the company's City of Dreams and Altira Macau casinos underperforming peers such as the Venetian and Wynn Macau, some investors are concerned about its ability to hold up to competition.

2. Financial risk
Although Melco Crown Entertainment's balance sheet is more conservative than those of its debt-laden peers MGM Resorts (NYSE: MGM) or Las Vegas Sands (NYSE: LVS), some investors prefer a lower debt load than what Melco holds. Coupled with a lack of reported free cash flow, some investors see too much risk.

3. China's tightening policies
VIP business makes up a big portion of Macau's business and any weakness in the segment will undoubtedly hamper revenues of Melco and peers like Las Vegas Sands. Although Chinese travel companies like Universal Travel Group (NYSE: UTA) and Ctrip.com (Nasdaq: CTRP) are benefiting from the rapid growth in tourism with Chinese consumers, some investors and analysts fear the Chinese government's tightening of monetary policies could keep wealthy gamblers away from Macau or lead them to trim their gambling budgets.

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