Melco One Of Best Sub-$10 Stocks, Says Morningstar

Posted on: February 28, 2024, 03:31h. 

Last updated on: February 28, 2024, 04:27h.

For less than the price of a Big Mac in some parts of the US, an investor can acquire two shares of Melco Resorts & Entertainment (NASDAQ: MLCO). That’s to say by price tag, the casino operator is cheap.

Philippine casinos gaming revenue pandemic
Melco Resorts City of Dreams in Manila. The stock was rated one of the 10 best under $10. (Image: Melco Resorts)

So cheap that it resides below $10, earning it a place on Morningstar’s recently revealed list of the 10 best stocks trading under $10. As of this writing, Lawrence Ho’s gaming company trades around $8.30, or less than some folks’ daily Starbucks tab.

That low price is the result of a 33.3% tumble over the past year — one that forced Ho off Forbes’ rankings of the richest people. Don’t cry for the Melco chief executive officer, however, because he’s still a billionaire. Still, Ho and other Melco investors have suffered for a while now. In mid-April 2021, the stock traded around $20 before tumbling to $4.85 on July 15, 2022.

To be fair, Melco isn’t the only underperformer among Macau gaming equities. The group notched dismal showings last year, forcing valuations to levels some analysts argued were reflective of catastrophic events, such as the global financial crisis and the start of the coronavirus pandemic.

Melco Can Rebound

There are important differences between cheap stocks and credible value names. Potentially bolstering the case for Melco is the point that some market observers believe the gaming stock is a value play.

Morningstar said the stock is worth $12.60, implying it’s undervalued by about 32%. To reach that price, Melco would need to climb more than 50% from current levels. It hasn’t closed above $12.60 since May 2023.

We believe the gambling market in Macao will enjoy solid growth in the longer term,” notes Morningstar analyst Jennifer Song. “This structural tailwind is driven by the rising middle class in China and the penetration rate of less than 2% in Macao, compared with Las Vegas’ 13%. New hotel rooms by major operators in the next few years should accommodate increased and extended visits from bigger spenders from these provinces, and drive the top line for integrated resort operators.”

In Macau, Melco operates City of Dreams, Morpheus, Studio City, and Altira. The company also runs casino hotels under the City of Dreams brand in Cyprus and Manila.

Macau Can Support Melco Resurgence

With nongaming revenue in Macau approaching 2019 levels and gross gaming revenue (GGR) on pace to meet or exceed pre-pandemic highs this year, Melco shares could rebound.

As one of only six concession holders to operate casinos in Macao, Melco Resorts & Entertainment is ideally placed to benefit from this market dynamic, given its portfolio of properties catering to both mass-market and premium patrons,” added Song. “We expect the launch of Studio City phase 2 with 900 luxury rooms in 2023 to be the next profit driver.”

Song noted that Melco’s exposure to both mass and premium-mass clients dampens the volatility associated with VIP customers, a segment that’s still struggling in Macau because of previous junket industry controversies.

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