Shares of Melco Resorts & Entertainment (MLCO +1.44%) have been on a hot streak rallying more than 40% in the past month.
The casino operator is benefiting from a recovery in gaming activity and visitor traffic to the Chinese administrative region of Macau where it generates the bulk of its business. Following several years of pandemic-era disruptions, it appears the company is finally moving forward.
With a path for long-term growth and climbing profitability, the setup here is positive, but is that enough to consider investing in Melco Resorts & Entertainment today?
NASDAQ: MLCO
Key Data Points
The dice are rolling in Macau
The company last posted first-quarter sales of $1.1 billion, up 55% year-over-year. Adjusted property EBITDA reached $299 million, an increase of 57% from Q1 2023.
The momentum was driven by a strong rebound in inbound tourism to Macau adding to the performance in all gaming segments and non-gaming operations including the hotel properties and retail space.
According to data from the Macau Statistics and Census Service, the city welcomed 2.7 million visitors in March, an increase of 40% from the period last year.
There's a good chance many of these tourists made their way to a Melco Resort such as the high-end "City of Dreams", or the "Studio City" property which targets the mass-market segment.
Image source: Getty Images.
Melco has a clear growth runway
Even with the higher visitor traffic, the March tally is still 80% of the peak pre-pandemic levels highlighting a tailwind for the business to keep improving through 2024.
A recent development has been an announcement by the Chinese government to facilitate access to Macau by mainland residents by expanding. Melco CEO Lawrence Ho pointed to updates and other initiatives as supporting a positive outlook. From the Q1 earnings conference call:
We remain extremely optimistic about Macau's continued growth potential.
Various initiatives recently announced by the Chinese government such as the multi-entry group tour visas between Macau and Hengqin, the new cities added to the IVS program in March, easier online visa application process for residents of China's 20 largest cities, as well as the proposed connection of Shenzhen to the Macau-Zhuhai bridge increases accessibility to Macau and enlarges our customer base.
Beyond the Macau properties, the company also operates the "City of Dreams Mediterranean" in Cyprus, as well as the "City of Dreams Manila" in the Philippines.
While assets outside Macau currently contribute a relatively small 19% to groupwide adjusted property EBITDA, the global presence adds diversification to the business model and represents an incremental growth driver.
The near-term priority is to reduce debt
A stronger operating environment for Melco Resorts & Entertainment will go a long way in helping the company manage its large debt position.
The company ended Q1 with $7.3 billion in total debt, against $1.3 billion in cash. With adjusted property EBITDA of approximately $1.2 billion over the trailing last month, a current net leverage ratio of 5x remains elevated and a weak point in the company's investment profile.
Favorably, the trend is already moving in the right direction with total debt down from as high as $8.4 billion at the end of 2022. The company believes it can pay down another $1 billion this year based on underlying cash flow.
Ultimately, the ability to shore up the balance sheet through stronger cash flow and earnings could be a positive for the stock.
What's next for Melco Resorts?
Melco Resorts & Entertainment remains a turnaround story with the next several quarters critical to confirming a path to success.
According to an average of Wall Street estimates, the company is expected to generate EPS of $0.23 this year, the first positive result since 2019.
While this level of earnings implies shares are trading at a pricey 37 times forward earnings, the expectation is for that valuation multiple to narrow through next year as the business continues to normalize. Shares look more attractive trading at 16 times the average 2025 Wall Street EPS estimate at $0.54.
If Melco continues to deliver solid earnings growth, the stock could be a good bet to rally higher.
