Shares of Melco Resorts & Entertainment (MLCO, Financial) surged as much as 15.93% on Thursday following the announcement that China's Politburo plans "necessary fiscal spending" to achieve a 5% GDP growth target.
This news led investors to anticipate increased visits to Macao, China's special administrative region, positively impacting the recovering gambling industry. Melco's shares closed the day up approximately 15.93% to a price of $7.57.
China's economy has been sluggish due to struggles in the real estate market and slowing growth, leading to a weak job market. To address this, the central bank and Beijing are expected to provide stimulus measures, though specific details are yet to be disclosed.
Macao is the only legal gambling hub in China, and Melco operates various establishments there, including Altira Macau, City of Dreams, Mocha Clubs, and Studio City.
Gambling revenue in Macao has already increased by 33.4% in 2024, and casinos have returned to profitability post-pandemic. The anticipated stimulus could further fuel this growth, benefiting Melco Resorts significantly.
From a valuation standpoint, Melco Resorts & Entertainment (MLCO, Financial) currently trades at $7.57 with a market capitalization of $3.33 billion. Despite the recent surge, the stock has several warning signs. The company shows poor financial strength, highlighted by an Altman Z-score of 0.2, placing it in the distress zone with a potential bankruptcy risk within two years.
Melco's financial metrics indicate that the company is burdened with debt, hence the poor interest coverage ratio of 0.49. The company's return on invested capital (ROIC) is only 3.98%, which is less than its weighted average cost of capital (WACC) of 6.39%, indicating inefficiency in capital usage.
However, the GF Value for Melco stands at $19.71, suggesting that the stock might be undervalued. For more details, visit the GF Value page.
It's worth noting that gambling revenues in Macao are showing a positive trend, and Melco's EBITDA growth rate of 303.9% over the last year reflects a significant recovery post-pandemic. Despite these positives, investors should weigh the financial risks indicated by various warning signs such as revenue and gross margin declines over the past five years.
In conclusion, while Melco Resorts & Entertainment (MLCO, Financial) shows potential upside given the positive outlook for Macao’s gambling industry and potential fiscal stimulus from China, investors should proceed with caution due to its considerable financial risks.
