Buy, Sell, or Hold Las Vegas Sands?

Last month, one of the biggest hedge funds, Paulson & Co., laid down a gigantic bet on the recovery of Las Vegas casinos. Purchasing 40 million shares in MGM Mirage (NYSE: MGM  ) and 4 million shares in Boyd Gaming (NYSE: BYD  ) , Paulson is obviously betting big that an economic rebound will help boost spending in an otherwise beaten- down sector.

Because Las Vegas Sands (NYSE: LVS  ) is the biggest strip operator (by market cap) in Vegas, it seems like a great time to evaluate: Is Las Vegas Sands a buy, sell, or hold?

Buy:

  • New developments: In April, Las Vegas Sands opened up the second-ever casino in Singapore, a massive project called Marina Bay Sands. The most expensive stand-alone casino to date, it has 2,500 rooms and boasts extraordinary amenities including a SkyPark, world-class restaurants, and boat rides through the luxurious shopping center. Marina Bay Sands, along with the other casino in Singapore, is expected to generate a whopping $3.5 billion in revenue next year. In addition, Las Vegas Sands is waiting on approval to open up three integrated resorts in Macau that sit on 200 acres of land; lastly, the company is developing the Sands Casino Resort in Bethlehem, Pa.
  • Macau exposure: As opposed to companies like MGM Mirage, which makes most of its money on the Vegas Strip, Las Vegas Sands brings in more than 70% of its revenue from Macau. It faces some tough competition from Wynn Resorts (Nasdaq: WYNN  ) and Melco Crown (Nasdaq: MPEL  ) , both of which do significant business in the region; however, Las Vegas Sands is still in a prime position to take advantage of a flourishing tourist destination in Macau.
  • Financials: Despite a struggling economy in the U.S., revenues have increased not only in Macau, but here at home as well. Revenue per available room (revPAR), a common hotel metric, has also increased in most Macau locations and has declined only slightly in Las Vegas. Overall, Las Vegas Sands is holding strong in very difficult economic conditions.

Sell:

  • Macau vulnerability: While Las Vegas Sands' Macau exposure has to be applauded, it also puts nearly all the company's eggs in one basket. And unfortunately, revenues in Macau declined in June by a pretty significant 20%. Sure, some of this can be attributed to the World Cup, but nevertheless, it could be an ominous sign. Furthermore, as the Chinese economy slows down and lending is reined in, Macau's VIP segment is expected to slow down. This is an extremely lucrative segment (it represents about 70% of Macau's gambling revenue) and could have a pretty big impact in the second half of the year.
  • The economy: At the risk of beating a dead horse, it still needs to be said that casino operators perform poorly when the economy tanks and discretionary spending gets put on lockdown. Fears about a double-dip recession, a much weaker euro, and less travel could all combine to hit Las Vegas Sands pretty hard.
  • Financials: Although the majority of its debt comes due from 2012 to 2015, the company has more than $10 billion in long-term debt. It has already had to put several projects on hold, and if credit tightens up again because of a U.S. slowdown, that could mean big cost overruns and increased expenses.

Hold:

  • Global concerns: If you're like me, you're probably worried about myriad things: a U.S. recovery that's much slower than anticipated, a financially crippled European Union, and the possibility that the rest of the world won't be able to ride China's economic coattails forever. If the volatility in the market tells us anything, it's that investors are finicky: One day the Dow plunges, the next day it's up 150-plus points. Now could be a good time to hold onto a stock like Las Vegas Sands, considering it depends so drastically on consumers'  ability to spend money above and beyond their ordinary means.

The final call
While the broad market has dropped by about 6% over the past six months, Las Vegas Sands has somehow managed to skyrocket by close to 30%. In fact, over the past year, the stock has tripled in price -- so the prudent side of me sees that 30 forward P/E multiple and wants to shy away.

However, if you've got some extra change and think that the global economic concerns could be a bit blown out of proportion, then I'd say Las Vegas Sands is a solid buy. The company has a firm footprint in Macau, and already has a big advantage in Singapore, which could turn into Southeast Asia's primary gambling center. And I like that it's not resting on its laurels here at home, as it continues to invest in what could turn out to be a nascent boom in Pennsylvania gambling.

Think I'm crazy for saying Las Vegas Sands is a buy? Whether you agree or disagree, sound off in the comments section below.

Jordan DiPietro doesn't own shares mentioned above. Melco Crown Entertainment is a Motley Fool Global Gains pick. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (49)

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  • Report this Comment On July 12, 2010, at 4:32 PM, spokanimal wrote:

    I couldn't help but to notice a significant difference between the "buy-side" arguments and the "sell-side" arguments... the buy arguments we're based on what "is" happening, and the sell arguments we're based on what "could" happen. I see why you like the stock!

    Some minor points of clarification:

    Regarding the Bethlehem PA facility, I'd prefer to consider the place "developed", rather than under-development. True, the hotel tower's being finished, but all the major revenue-producing elements, including the launch of table-games this month, are in place.

    Secondly, the "3 new (macau) resorts under devolopment on Cotai are "virtually approved"... even the table-game allotment (under the new supply restrictions of said games) is secured at around 450 tables.

    Your "sell" arguments are quite a reach as, I'm sure you know, there are few such arguments.

    The "20% decline" in gaming revenues is a "serial" number (month-over-month change). The Year-over-year change was a massive +64%. Since May's year-over-year gain was +96%, of COURSE the month-over-month number was down. Talk about spin!

    Talk of a "double-dip" recession is dubious, at best, and only a US phenomenon... Chinese growth is pretty much expected to soften from aroung 11.5% to somewhere around 9%. With some 85% of LVS's revenues coming from Macau/Singapore, the "double-dip" term is pretty much misplaced.

    Although LVS still rates a B- in financials, that's the same rating they had when it was on the verge of bankruptcy some 18 months ago. New debt financings, a bid Hong Kong IPO, and surging EBITDA certainly changes the outlook dramatically but, you know Moody's-et-al... they're stuck at B- long after the threat is gone. What that means, however, is that current LVS shareholders have much to look forward to... as the credit rating goes up over the next few years, so will their stock as risk-averse buyers pile in.

    One negative you didn't mention: there is a chance the Chinese govt. could revisit visa restrictions by year end if the torrid rate of growth in Macau continues....

    .... If you're going to have a problem, I guess that's the one to have, eh?

    Spokanimal

  • Report this Comment On July 13, 2010, at 1:29 PM, etaster wrote:

    Having made a lot of money in LVS, I've started taking profits for one simple reason---American corporate CEO's (i.e. GE) are complaining about their inability to compete equitably in China. As well, I still remember the MacDonald's fiasco there on property rights.

    My worry is that China could and is very likely to change the rules of the game without notice and demand a much higher share of the take. Their gererosity in Macau is totally out of character.

  • Report this Comment On July 13, 2010, at 1:32 PM, etaster wrote:

    "generosity, not gererosity"

  • Report this Comment On July 14, 2010, at 12:13 PM, liqitang wrote:

    Agree with the buy recommendation.

    Just want to mention that gambling is actually very recession-proof. It is an unfortunate reality but good for Casinos. The biggest effect of weakening economy is the declining of business conferences in Vegas. LVS started this concept and they are the best at it. They do see an increase conference booking this year.

    A slow recovery in Vegas could actually benefit LVS. It continues to use cash generated from Macau to maintain financial health. As competitors struggle, it could look for cheap deals to expand in Vegas. Overall, LVS should outperform among its peers.

  • Report this Comment On July 15, 2010, at 2:16 PM, vancouverromeo wrote:

    The lower Macau VIP revenues in June vs May have more to do with the Chinese national May Day "golden week holiday" which makes May seasonally high in revenue for Macau casinos. Anyway revenues are still up more than 50% over last year overall, and for some firms even more eg:

    AERL is another Macau casino related stock reporting blowout numbers as seen in the link 119% growth year on year:

    http://finance.yahoo.com/news/Asia-Entertainment-Resources-b...

    Because of the recent euro debt crisis, it has now dropped to 5x p/e . cheap Warrants (AERLW) are available for those looking for more upside, according to this report:

    http://seekingalpha.com/instablog/344114-spac-analytics/8025...

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