3 Ways to Play Gaming Sector Earnings

Breaking down two straddle strategies and a bull call spread

    View All  
3 Ways to Play Gaming Sector Earnings

Melco Crown Entertainment Ltd. (NASDAQ:MPEL)

Melco Crown Entertainment specializes in the red-hot Macau gaming market in China. Macau has been a gold mine for companies like Melco, with gambling revenue soaring 24% year-over-year in March. However, the pace of revenue growth appears to be slowing, as March growth was not as steep as last year. What’s more, Wells Fargo analysts believe that April revenue growth will come in at 22%, below the current consensus estimate (http://www.macaubusiness.com/news/gaming-revenue-for-april-may-fall-below-expectations/15769/).

Slowing growth should not affect Melco’s coming quarterly earnings report, which is slated to hit the Street on May 2, but it could have an impact on guidance. For the record, Wall Street is anticipating a profit of 17 cents per share for Melco, a massive improvement over the company’s profit of a penny per share last year. Historically, the firm has missed expectations twice and matched twice in the past year, resulting in an average downside surprise of roughly 13%.

Despite these potential warning signs, expectations appear to be quite high for Melco ahead of its quarterly report. The brokerage firm has handed out 15 “buys,” three “holds,” and just one “sell” on MPEL, while the stock’s front-month put/call open interest ratio of 0.27 indicates that calls nearly quintuple puts in the May series of options.

Technically speaking, some of this optimism is warranted. MPEL is up an impressive 61% so far in 2012, with the shares riding support at their 10-day and 20-day trendlines. However, the equity is currently on the verge of being overbought, with its 14-day RSI hovering just below 70. The stock is also facing potentially stiff overhead resistance in the $16 area – home to its August 2011 peak.

Guidance will be key for Melco when it reports next week. With high investor expectations, any misstep could send the stock sharply lower. That said, inline guidance and a better-than-expected quarter could fan the bullish flames. Once again, it appears that a straddle may be in order. Traders might want to consider a MPEL May 15 straddle ahead of earnings. This trade was last offered at $1.55, or $155 per pair of contracts, with breakeven arriving at $16.55 (a gain of 9.7%) and $13.45 (a decline of 10.8%).

Wynn Resorts, Limited (NASDAQ:WYNN)

Wynn Resorts, Limited, another heavy hitter in the gaming sector, has yet to officially set a date for its turn in the earnings limelight. Given past report dates, however, Wynn should be stepping up to the plate within the next week or so. When it does, Wall Street will be expecting a profit of $1.41 per share, which is a modest improvement over the company’s profit of $1.38 per share in the year-ago period.

The whisper number is set considerably higher at a profit of $1.51 per share.

That said, expectations are not quite as bullish across the board as the whispers would suggest. For instance, the brokerage community has room for improvement, with 11 of the 25 analysts following WYNN rating it a “hold” or worse. Additionally, the stock’s front-month put/call open interest ratio of 0.75 is pretty middle of the road given that WYNN options traders are typically much more call-heavy in terms of open interest.

WYNN’s technical backdrop may offer some insight into this lack of motivation from the bulls. Specifically, the shares have gained a mere 13% since the start of 2012, with WYNN spending much of the past two months bouncing around between support at its 50-day moving average and resistance at its 200-day trendline. The former is hovering near $123, while the latter trendline rests near $128, leaving WYNN with only about five points of wiggle room.

Luckily for WYNN bulls, earnings reports can provide excellent motivators. With WYNN’s expectations arriving below par compared to the rest of the gaming sector, the shares could be primed for a post-earnings surprise. As such, traders might want to consider a WYNN May 125/135 bull call spread. This trade was offered at $3.19, or $319 per pair of contracts, at the close of trading on Tuesday. Breakeven lies at $128.19, with a max profit of $6.81, or $681 per pair of contracts, achievable if WYNN closes at or above $135 when May options expire.

As of this writing, Joseph Hargett does not own any shares referenced here.  

 


Article printed from InvestorPlace Media, http://investorplace.com/2012/04/3-ways-to-play-gaming-sector-earnings/.

©2014 InvestorPlace Media, LLC

Comments are currently unavailable. Please check back soon.