Warren Buffett attracts a lot of attention. As the world's third-richest person and most celebrated investor, thousands try to glean what they can from his thinking processes and track his investments.
While we can't know for sure whether Buffett is about to buy Las Vegas Sands (NYSE: LVS ) -- he hasn't specifically mentioned anything about it to me -- we can discover whether it's the sort of stock that might interest him. Answering that question could also inform whether it's a stock that should interest us.
In his most recent 10-K, Buffett lays out the qualities he looks for in an investment. In addition to adequate size and a reasonable valuation, he demands:
- Consistent earnings power.
- Good returns on equity with limited or no debt.
- Management in place.
- Simple, non-techno mumbo jumbo businesses.
Does Sands meet Buffett's standards?
1. Earnings power
Buffett is famous for betting on a sure thing. For that reason, he likes to see companies with demonstrated earnings stability.
Let's examine Sands' earnings and free cash flow history:
Source: Capital IQ, a division of Standard & Poor's. Free cash flow is adjusted based on author's calculations.
Source: Capital IQ, a division of Standard & Poor's. Free is adjusted based on author's calculations.
Las Vegas Sands has had difficulty remaining profitable over the past few years and has burned through a lot of cash in order to invest in its properties.
2. Return on equity and debt
Return on equity is a great metric for measuring both management's effectiveness and the strength of a company's competitive advantage or disadvantage -- a classic Buffett consideration. When considering return on equity, it's important to make sure a company doesn't have an enormous debt burden, because that will skew your calculations and make the company look much more efficient than it actually is.
Since competitive strength is a comparison between peers, and various industries have different levels of profitability and require different levels of debt, it helps to use an industry context.
|
Company
|
Debt-to-Equity Ratio
|
Return on Equity (LTM)
|
Return on Equity (5-year average)
|
|
Las Vegas Sands
|
165%
|
(2%)
|
8%
|
|
MGM (NYSE: MGM )
|
458%
|
(55%)
|
2%
|
|
Wynn (Nasdaq: WYNN )
|
105%
|
4%
|
11%
|
|
Melco Crown (Nasdaq: MPEL )
|
79%
|
(7%)
|
(6%)
|
Source: Capital IQ, a division of Standard & Poor's.
It's not a pretty time for many casino operators, but based on these metrics Las Vegas and Wynn have generated higher historical returns and have less debt. However, these aren't high returns on equity in absolute terms.
3. Management
Sands' CEO, Sheldon Adelson, has been at the job since 2004, though his time at the company spans several decades.
4. Business
The rate of technological development in gambling is not the same as it is, say, in cloud computing.
The Foolish conclusion
Regardless of whether Buffett ever buys Las Vegas Sands, we've learned that the company exhibits several characteristics of a quintessential Buffett investment: tenured management and a business that doesn't rely too heavily on technology innovation. Buffett would probably prefer to see a business with a stronger competitive advantage and steadier earnings.
RSS Headlines
Fool UK