Should you sell your Crown Resorts Ltd shares?

The outlook for Crown Resorts Ltd (ASX:CWN) suggests its Macau operations face serious headwinds however the shares could still potentially make an attractive investment.

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The ebb and flow of the share market is an interesting phenomenon. So too are the swings from "in favour" to "out of favour" for the many stocks listed on the ASX. At any point in time one company can be riding high on a wave of positive sentiment, while at the same time a peer can be surrounded by negativity and completely unloved.

This has been the case for Australia's two leading casino owners and operators Crown Resorts Ltd (ASX: CWN) and Echo Entertainment Group Ltd (ASX: EGP).

For most of 2012 through to early 2014, Echo – whose prime asset is Sydney's The Star casino – was on the nose with the investment community. This saw the stock trade down to an all-time low. During this period the market had a generally negative view on the major upgrade underway at its Sydney venue, with this negativity compounded when Crown was granted a restricted license to operate a second casino directly opposite The Star.

In contrast, the James Packer-led Crown roughly doubled in value over the 2012 through early 2014 period – in short, it was a market darling. The investor positivity towards Crown can at least partially be explained by solid domestic momentum including the NSW casino license and the enticing international growth prospects, which included the fast-growing Chinese market of Macau.

What a difference a year can make!

The past 12 months tell a quite different story however… The share price of Crown has slumped almost 19%, meanwhile Echo's shares have soared nearly 61%.

The pendulum of investor sentiment has certainly swung in the opposite direction!

Crown's fall can in part be blamed on the weaker-than-expected performance of the group's Macau assets which have been hit by the Chinese government reigning in gambling across the island. Given the Macau operations contribute around 40% to the group's earnings, a slowdown is of concern as it has the potential to be structural due to changes in regulation rather than cyclical.

The potential for lower profitability and lower returns on invested capital from its Macau-based assets should have investors reassessing their valuation on Crown. Despite these headwinds however, it is possible that it is more than fully reflected in the share price.

According to data supplied by Morningstar, Crown is forecast to record a 15.7% decline in earnings per share (EPS) in the current 2015 financial year (FY). EPS growth is then expected to resume in FY 2016 with EPS increasing 21.4%. Based on these forecasts, Crown is trading on a FY 2016 price-to-earnings (PE) ratio of 15x. That's well below the forecast for the S&P/ASX 300 (Index: ^AXKO) (ASX: XKO) of 17.8x and arguably an attractive price level to hold or buy the stock at.

Motley Fool contributor Tim McArthur has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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