Can Melco Resorts (MLCO) Pull Off A Surprise In Q3 Earnings?

Melco Resorts & Entertainment Limited (NASDAQ:MLCO) is scheduled to report third-quarter 2017 results on Nov 2, before the opening bell. Its revenues and earnings are expected to improve on a year-over-year basis.

Last quarter, this developer, owner and operator of casino gaming and entertainment casino resort facilities in Asia, witnessed a negative earnings surprise of 20%. However, prior to that, the company’s earnings surpassed the Zacks Consensus Estimate in each of the trailing three quarters, with an average beat of 108.75%.

In fact, the Zacks Consensus Estimate for third-quarter earnings is pegged at 19 cents, reflecting an increase of 46.2% over the prior-year quarter. Also, revenues are expected to improve 11.6% year over year to $1.29 billion.

Notably, a look at the company’s price performance also reveals that it outperformed the industry year to date. Shares of Melco Resorts have gained around 48.7% compared with the industry’s growth of 24.7%.

Will the stock keep rallying post third-quarter earnings release? It majorly depends on whether it is able to maintain its earnings momentum.

Our quantitative model predicts that Melco Resorts does not have the right combination of two main ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — for increasing the odds of an earnings beat.

Zacks ESP: Melco Resorts has an Earnings ESP of 0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: Melco Resorts carries a Zacks Rank #3, which increases the predictive power of ESP. However, the company’s 0.00% ESP makes surprise prediction difficult.

Conversely, we caution against stocks with a Zacks Rank #4 or 5 (Sell rated) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Factors Likely to Influence Q3 Results

Per Macau’s Gaming Inspection and Coordination Bureau (“DICJ”), gross gaming revenues (GGR) rose in all the three months of the quarter. This, in turn, indicates that the casino hub is firmly on its path to recovery. In fact, Macau’s VIP numbers is reported to have witnessed 35% expansion in the quarter, with VIP baccarat leading the surge of casino GGR. We thus expect the company’s performance in the region to get a boost in the to-be-reported quarter.

Meanwhile, better performance at the non-gaming segments like rooms and food and beverages are further expected to drive the quarter’s results. Notably, the company’s large-scale resorts provide distinctive lodging, entertainment and retail options, which appeals to a broader audience from around the region.

Additionally, Melco Resorts’ cost-control efforts including effective management of marketing expenses are likely to drive third-quarter profits and margins. Markedly, the addition of new VIP tables at the company’s Studio City property is also aiding in delivering a broader product offering to a wider breadth of customers. This, in turn, is expected to continue driving increased profitability in the quarter.

Management expects Philippines’ gaming industry to be supported by the country's robust economic growth and its expanding inbound tourism strategy. Thus, Melco’s Entertainment City property therein is poised to largely benefit from this growth.

However, stringent capital controls by the Chinese government and increased audits of the junket industry by DICJ in order to stop money laundering might have somewhat restricted gaming revenues in Macau. This may weigh on the company’s quarterly results as well.

Stocks to Consider

Here are some other companies to consider as our model shows they have the right combination of elements to post an earnings beat this quarter:

Take-Two Interactive Software, Inc. (NASDAQ:TTWO) has an Earnings ESP of +5.69% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Red Rock Resorts, Inc. (NASDAQ:RRR) has an Earnings ESP of +22.16% and a Zacks Rank #3.

Live Nation Entertainment, Inc. (NYSE:LYV) has an Earnings ESP of +4.59% and a Zacks Rank #3.

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