What?
Shares of Crown Resorts Ltd (ASX: CWN) have fallen by 16% over the last 16 weeks on fears that gaming growth in Macau and Australia is slowing. The fall in Crown's share price can be explained by the 25% drop in the share price of Macau-based casino group Melco Crown, which Crown holds a 33% stake in.
So What?
Fundamentally, little has changed for Crown. There have been some concerns surrounding growth in global gaming markets for the past 18 months as VIP revenue in Australia and Asia has grown slower than some forecasters had estimated.
Investors should keep in mind that Melco Crown still managed to grow first quarter revenue by 19% and earnings by 31%. Unless this growth drops off significantly, which I consider unlikely over the medium term with so many growth catalysts in the pipeline, the current price appears attractive for a long-term entry into the stock.
Now What?
The next four or five years will be a period of growth and investment for Crown and Melco Crown. Crown has new casinos to come in Sydney, Sri Lanka, and potentially Japan and the USA, as well as upgrades to existing Australian facilities.
In my view, the main risk for Crown is a poor investment decision when chasing growth. James Packer is in charge of the company and has made some exceptional investments during his time, however with Crown active on so many fronts, there is the chance that one of the future growth projects underperforms and becomes a drag on earnings.
Having said that, Crown's share price is now back to where it was in September 2013 and is trading on an estimated forward price-to-earnings ratio of 16.5. This compares with an average of around 17.5 over the past six years, however with earnings per share expected to rise by 15% in each of the next two years and further accelerate in the years after that, the valuation may well be justified.
