Melco Resorts (NASDAQ:MLCO) is one of the largest casino companies in the world and holds just one of six gambling concessions in Macao, the world's largest gambling market, yet it's often overlooked by investors. Larger companies like Las Vegas Sands, Wynn Resorts, and MGM Resorts are more visible to U.S. investors, but that doesn't make them better buys.
Given Melco Resorts' valuable asset base and growth potential in Asia, is this casino stock a buy? Let's take a look.
What Melco Resorts does
There are three main resorts where Melco Resorts generates cash flow right now. The first is City of Dreams in Macau, which generated $251 million in adjusted EBITDA, a proxy for cash flow, in the second quarter of 2019. Studio City, a Macao resort Melco has a majority stake in, generated $95 million in EBITDA, and City of Dreams Manila added $83 million in EBITDA. Small properties called Altira and the Mocha Clubs generate very little cash each quarter.
To add to the assets, the company acquired a 19.99% stake in Crown Resorts Limited, an Australian hotel and casino company. There are also potential developments in Japan and other Asian communities that are looking to expand gambling.
Melco Resorts' value
Any casino company should be measured by the cash flow it generates for investors, and Melco Resorts is no different. Over the past 12 months, Melco Resorts has generated $1.3 billion in EBITDA and continues to grow.
On the valuation side, we compare EBITDA to enterprise value, which is a company's market cap plus its debt. An EV/EBITDA ratio of 10 or less is a great value in the casino industry, and you can see that Melco Resorts trades just above that.
The icing on the cake
Where I think Melco Resorts becomes a buy for investors is when you consider what it brings to the table beyond existing EBITDA or cash flow. I mentioned the 19.99% stake in Crown Resorts, which could increase over time. Taking control of some of Australia's biggest resorts could bring synergies and cross-promotion opportunities with Macao and add value to both companies.
The bigger upside would be in Japan, where Melco Resorts is one of a small number of very large casino companies bidding to build a multibillion-dollar casino. The winner could generate billions per year in EBITDA, which may effectively double Melco Resorts' cash flow if it wins the right to build there. The growth opportunity would be costly at $10 billion or more, but there will only be three resorts in a region that may generate $10 billion in casino revenue annually, and it's worth paying a premium for any company with the opportunity to build there.
Long-term, I think Melco Resorts is well positioned to be a big winner in the casino industry, and that's why I'm keeping my outperform call on my CAPS page. The stock will be volatile in the short term, but you can't argue with the cash-generating machine the company has become, and it has a lot of growth opportunities ahead.