On Wednesday, BofA Securities revised its stance on Melco Resorts & Entertainment Limited (NASDAQ:MLCO) stock, shifting from a Neutral to a Buy rating.
The firm also increased the price target for the company's shares to $10.40, up from the previous target of $7.50. The upgrade reflects a positive outlook on the company's recent performance and future prospects, particularly in the Macau gaming market.
According to BofA Securities, Melco Resorts has seen benefits from its investment in customer services since the beginning of the year.
This, along with a reduction in promotional competition within the industry, is expected to contribute to a sustained recovery in Melco's market share of Gross Gaming Revenue (GGR) in Macau. The market share is anticipated to increase from 14.2% in the first quarter of 2024 to over 15% for the remainder of the year.
The valuation of Melco Resorts was also a key factor in the upgrade. BofA Securities noted that the company's valuation, at 8.2 times its estimated 2024 earnings before interest, taxes, depreciation, and amortization (EBITDA) and 6.0 times cash earnings, is currently 1 to 2 standard deviations below its historical average.
This is seen as an attractive entry point for investors, given Melco's improved execution and the likelihood of gaining market share.
The price objective was raised by 39% based on upgraded estimates and a higher 2024E cash price-to-earnings (P/E) multiple of 7.8 times, which is 1.5 standard deviations below the historical average, compared to 2 standard deviations previously.
This implies a 9.4 times EBITDA multiple. BofA Securities' outlook appears to be buoyed by the company's strategic moves and market conditions that favor Melco's growth.
Despite the optimistic upgrade, BofA Securities cautioned investors about company-specific risks associated with Melco Resorts. High leverage, potential investor reactions to new investments, and the possibility of higher-than-expected operating costs were cited as factors that could impact the company's financial health and stock performance.
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