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 (MLCO, Financial). The stock, which is currently priced at 10.19, recorded a loss of 3.37% in a day and a 3-month decrease of 17.09%. The stock's fair valuation is $20.21, 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 three factors:
- 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.
- Future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. The stock price will most likely fluctuate around the GF Value Line. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher.
Uncovering Potential Risks
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 -0.11, 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?
These indicators suggest that Melco Resorts and Entertainment, despite its apparent undervaluation, might be a potential value trap. This complexity underlines the importance of thorough due diligence in investment decision-making.
Understanding the Altman Z-Score
Before delving into the details, let's understand what the Altman Z-score entails. Invented by New York University Professor Edward I. Altman in 1968, the 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.
Company Overview: 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. The business mix in terms of adjusted EBITDA was about 84% from Macao with the rest largely from the Philippines as of 2019.
