On Monday, BofA Securities adjusted its stance on shares of Melco Resorts & Entertainment Limited (NASDAQ: MLCO), downgrading the stock from Buy to Neutral while raising the price target to $9.20, up from the previous $7.20. The revised price objective represents a 28% increase from the earlier figure.
The analyst from BofA Securities cited several factors influencing the decision to change the rating and price target for Melco. Despite a strong performance in Macau's Gross Gaming Revenue (GGR) during the October Golden Week holiday and China's assertive economic policy measures easing some investor worries about severe macroeconomic risks, a rebound in consumer spending is expected to be gradual.
Furthermore, while Melco has been actively working to enhance service quality and recapture market share in GGR, the firm anticipates that it will take additional time before significant progress is evident. The analyst pointed out that investors are likely to prioritize income returns in the context of sluggish growth. With the expectation that Melco will not reinstate its dividend until 2026, a Neutral rating was deemed more fitting.
The analyst also noted that Melco's current valuation is not considered demanding, trading at 8.6 times its estimated 2025 EBITDA and 7 times cash P/E. The target price is set at a multiple of 9.2 times the projected 2025 EBITDA, which is roughly 1 standard deviation below the historical average, reflecting the belief that there is limited potential for a re-rating of the stock.
The target cash earnings multiple remains at 7.8 times, which is 1.5 standard deviations below the historical average, to account for this view.
InvestingPro Insights
Recent data from InvestingPro adds context to BofA Securities' analysis of Melco Resorts & Entertainment Limited. The company's market cap stands at $3.47 billion, with a significant revenue growth of 95.37% over the last twelve months as of Q2 2024. This growth aligns with the analyst's observations about Macau's strong Gross Gaming Revenue performance.
However, InvestingPro Tips highlight that Melco is not currently profitable, which supports BofA's decision to downgrade the stock to Neutral. The company's P/E ratio of -65.08 (adjusted for the last twelve months) further underscores the profitability challenges mentioned in the article.
Interestingly, while BofA raised its price target, InvestingPro data shows a fair value of $10.32, suggesting potential upside. This, coupled with the strong returns over the last month (38.18%) and three months (18.83%), indicates that investors are optimistic about Melco's prospects, despite the current lack of profitability.
The InvestingPro Tip noting that Melco does not pay a dividend to shareholders corroborates the analyst's point about dividend reinstatement not expected until 2026, which influenced the Neutral rating.
For investors seeking a more comprehensive analysis, InvestingPro offers 7 additional tips for Melco Resorts & Entertainment Limited, providing a deeper understanding of the company's financial health and market position.
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