Melco Resorts (NASDAQ:MLCO) is the only major U.S.-traded gaming company that's a pure play on Asia's massive gaming market. The company started in Macau and now has a resort in the Philippines and its eyes on a bid in Japan.
It also has one of the best balance sheets in the industry, allowing for options to expand the company or pay increased dividends in the future. But is the stock a buy?
Where Melco Resorts makes its money
The chart below gives a good feel for where Melco Resorts' money comes from. Studio City and City of Dreams Manila are growing in importance, but a vast majority of EBITDA (a proxy for cash flow from a resort) comes from City of Dreams in Macau. And keep in mind that it controls but doesn't fully own either City of Dreams Manila or Studio City. (Note: The EBITDA figures below are per quarter.)
While City of Dreams is still the revenue and EBITDA driver, it's losing its luster in Macau. The resort opened in 2009, and since then, Las Vegas Sands (NYSE:LVS) and Wynn Resorts (NASDAQ:WYNN) have opened megaresorts nearby that have siphoned off customers. MGM Resorts (NYSE:MGM) and SJM also have new properties currently under construction.
The Cotai region of Macau is growing, but competitors could be eating away at potential growth from City of Dreams. That doesn't mean it's not a great resort; it's just not a growth property right now.
Growth options are limited
Outside of organic growth, there aren't a lot of growth options for Melco Resorts. Macau isn't going to allow new resorts to be built for the foreseeable future and the Philippines market is pretty saturated. Japan is the only major market that may open up, but Las Vegas Sands, MGM, and Wynn all have their eyes on the opportunity. And it may take $10 billion to build a resort in Japan, which would stretch Melco Resorts thin financially.
Melco Resorts value
If there aren't many growth options, then Melco Resorts should be valued as the company it is today, which is a cash flow machine. In the past year, the company has generated $1.28 billion in EBITDA compared to $2.2 billion in net debt and a $12.3 billion market cap. That gives the company an 11.4 times enterprise value-to-EBITDA ratio (enterprise value is market cap plus net debt).
I think Melco Crown is a great cash flow company, but its valuation isn't very attractive given the fact that Las Vegas Sands and Wynn Resorts both have similar enterprise value/EBITDA multiples and better growth prospects. If the stock drops, it could be an attractive buy, but for now, I'll be staying out of the stock.