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Reasons Why You Should Add Melco Stock to Your Portfolio Now

Zacks

Melco Resorts & Entertainment Limited MLCO is currently a well-performing gaming stock with solid future potential. If you haven’t taken advantage of its share price appreciation yet, it's time you add this stock to your portfolio.

Shares of Melco have gained 30.7% in the past year, outperforming the industry’s rally of 15.8%. Earnings estimates for the current quarter and year increased 8.3% and 18.8%, respectively, over the past two months, reflecting analysts’ unwavering optimism on the company’s future earnings potential.

Let’s delve deeper into the factors that make this Zacks Rank #1 (Strong Buy) company a lucrative investment choice now. You can see the complete list of today’s Zacks #1 Rank stocks here.


Revenue Growth From Gaming & Non-Gaming Services


In addition to distinguished gaming services, Melco has a portfolio of non-gaming offerings that include food, beverage and hotel services. The company’s solid performance in the non-gaming segment is expected to continue. Notably, the company’s large-scale resorts provide distinctive lodging, entertainment and retail options that appeal to a broader customer base. Markedly, the addition of new VIP tables at the company’s Studio City property is also aiding it to deliver a broader product offering to a wider breadth of customers, which will continue to drive the top line. Driven by robust performance in both the segments, the Zacks Consensus Estimate for 2018 revenues is pegged at $5.4 billion, reflecting 1.7% growth from 2017.

Cost-Control Initiatives to Drive Earnings

Melco’s cost-control efforts such as effective management of marketing expenses are expected to continue driving profits and margins. Arguably, earnings growth is of utmost importance for determining a stock’s potential, as surging profit levels indicate solid prospects (and stock-price gains). For 2018, Melco’s earnings are expected to grow 44.6%.

Return on Equity & Net Margin

Melco delivered a return on equity (ROE) of 15.1% in the trailing 12 months compared with the industry’s figure of 5.5%. This indicates that the company reinvests more efficiently than industry peers.

Traditionally, gross margin for the hospitality companies is comparatively higher, as majority of the expenses come from cost of operations. However, the sector’s profits are not very high, which is evident from the net profit margin or net margin. The industry’s trailing 12-month net margin is 3.7%, while that of Melco’s is 7.3%.

Favorable Industry Scenario

Being one of the largest entertainment markets in the world, casinos seldom fail to build businesses. This is because demand for casino services is relatively inelastic, as it targets a fixed range of consumers who will continue to visit casinos irrespective of market conditions. Subsequently, the gambling market is positioned for substantial growth in the long term.

Per a report by Research and Markets, the casino gaming market in the United States is expected to witness compound annual growth rate of 4.74% in the 2017-2021 period. Moreover, backed by a rise in discretionary spending and lenient government regulations, Melco, following the path of most other casino giants like Wynn Resorts WYNN, Penn National PENN and Las Vegas Sands LVS, is about to sustain and carry forward its growth story. Moreover, the recent court ruling that allows sports betting at casinos is an added advantage for these companies. Per Eilers&Krejcik Gaming 2017 reports, the legal sports betting market is likely to garner $6.03 billion in revenues annually by 2023.

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