Is Melco Resorts and Entertainment (MLCO) Too Good to Be True? A Comprehensive Analysis of a ...
Value-focused investors are always on the hunt for stocks that are priced below their intrinsic value. One such stock that merits attention is Melco Resorts and Entertainment Ltd (NASDAQ:MLCO). The stock, currently priced at $9.18, recorded a loss of 2.7% in a day and a 3-month decrease of 25.35%. The stock's fair valuation is $20.78, as indicated by its GF Value.
Understanding the GF Value
The GF Value represents the current intrinsic value of a stock derived from our exclusive method. The GF Value Line on our summary page gives an overview of the fair value that the stock should be traded at. It is calculated based on historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at, GuruFocus adjustment factor based on the company's past returns and growth, and future estimates of the business performance.
However, investors need to consider a more in-depth analysis before making an investment decision. Despite its seemingly attractive valuation, certain risk factors associated with Melco Resorts and Entertainment should not be ignored. These risks are primarily reflected through its low Altman Z-score of -0.14, and the company's revenues and earnings have been on a downward trend over the past five years, which raises a crucial question: Is Melco Resorts and Entertainment a hidden gem or a value trap?
The Altman Z-Score: A Measure of Financial Health
The Altman Z-score is a financial model that predicts the probability of a company entering bankruptcy within a two-year time frame. The Altman Z-Score combines five different financial ratios, each weighted to create a final score. A score below 1.8 suggests a high likelihood of financial distress, while a score above 3 indicates a low risk.
A Snapshot of Melco Resorts and Entertainment
Melco Resorts and Entertainment is one of only six licensed casino operators in Macao. It operates Altira, a complex focused on VIP customers; City of Dreams, an integrated resort in Cotai serving both mass-market and premium patrons; and Mocha Clubs electronic gaming machines. The company also has a majority interest in Studio City, which opened in 2015. Outside Macao, Melco owns City of Dreams Manila in the Philippines and City of Dreams Mediterranean in Cyprus.
Breaking Down Melco Resorts and Entertainment's Low Altman Z-Score
The Retained Earnings to Total Assets ratio provides insights into a company's capability to reinvest its profits or manage debt. Evaluating Melco Resorts and Entertainment's historical data, 2021: -0.27; 2022: -0.36; 2023: -0.43, we observe a declining trend in this ratio. This downward movement indicates Melco Resorts and Entertainment's diminishing ability to reinvest in its business or effectively manage its debt. Consequently, it exerts a negative impact on its Z-Score.
Operational Efficiency and Asset Turnover
A vital indicator for Melco Resorts and Entertainment is its asset turnover. The data: 2021: 0.21; 2022: 0.19; 2023: 0.25 from the past three years suggests a decreasing trend in this ratio. The asset turnover ratio reflects how effectively a company is using its assets to generate sales. Therefore, a drop in this ratio can signify reduced operational efficiency, potentially due to underutilization of assets or decreased market demand for the company's products or services.
Declining Revenues and Earnings: A Red Flag
In the case of Melco Resorts and Entertainment, both the revenue per share (evident from the last five years' TTM data: 2019: 11.08; 2020: 8.07; 2021: 3.82; 2022: 3.57; 2023: 5.07; ) and the 5-year revenue growth rate (-25.6%) have been on a consistent downward trajectory. This pattern may point to underlying challenges such as diminishing demand for Melco Resorts and Entertainment's products, or escalating competition in its market sector.
The Risk of a Value Trap
Despite its low price-to-fair-value ratio, Melco Resorts and Entertainment's falling revenues and earnings cast a long shadow over its investment attractiveness. A low price relative to intrinsic value can indeed suggest an investment opportunity, but only if the company's fundamentals are sound or improving. In Steelcase's case, the declining revenues, EBITDA, and earnings growth suggest that the company's issues may be more than just cyclical fluctuations.
Conclusion
Without a clear turnaround strategy, there's a risk that the company's performance could continue to deteriorate, leading to further price declines. In such a scenario, the low price-to-GF-Value ratio may be more indicative of a value trap than a value opportunity. This complexity underlines the importance of thorough due diligence in investment decision-making.
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This article first appeared on GuruFocus.
