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The casino business has come a long way since being on the brink of mass bankruptcies two years ago. Las Vegas Sands (NYSE: LVS ) stock is up more than 2,500% since closing at $1.42 on March 9 last year. Wynn Resorts (Nasdaq: WYNN ) has taken a similar but slightly less dramatic run during the same time. But as these stocks rocket upward, long-term investors should ask themselves if these stocks have become overvalued and it's time to take a profit.
There are many possible valuation methods to determine a stock's worth, but what we'll be looking at is enterprise value divided by earnings before interest, taxes, and depreciation -- a method that can be used to value casino companies. EBITDA is commonly used when evaluating gaming companies because it eliminates interest and non-cash depreciation charges, allowing us to evaluate property performance with less noise.
To make calculations straightforward, I will use the numbers straight from the quarterly filings ignoring some complications I will discuss later. Below is a table of Las Vegas Sands' EBITDA in the U.S., Macau, and Singapore over the past four quarters. As you can see, not only is Macau the biggest piece of the pie, but it's also growing at a rapid rate.
|Q3 2009||Q4 2009||Q1 2010||Q2 2010||Total|
Source: Securities and Exchange Commission filings. Dollar amounts in millions.
This gives us an EBITDA of $1,423 million over the past year. The only problem is this only includes a partial quarter of Singapore operations, so we need to estimate what Singapore will contribute going forward. Based on company projections and initial results, I'm comfortable saying Singapore will conservatively generate $250 million in EBITDA per quarter in relatively short order. Using this number we have a total company EBITDA of $2.33 billion.
At the end of the quarter, the company had $10.4 billion in long-term debt, and current capitalization stands at $26.3 billion for a total EV of $36.7 billion.
This means our EV/EBITDA multiple is 15.74 given the assumptions I have outlined. How does this stack up to other operators focused in Asia?
|Las Vegas Sands||$2.33 billion||$36.7 billion||15.74|
|Wynn Resorts||$927 million||$16.0 billion||17.24|
|Melco Crown Entertainment (Nasdaq: MPEL )||$219 million||$5.0 billion||22.65|
Source: SEC filings.
So by this metric, it appears Las Vegas Sands is certainly not overvalued compared to competitors and may be the cheapest stock of the bunch. It is even valued lower than the 16.69 EV/EBITDA ratio MGM Resorts (NYSE: MGM ) is currently trading at, and MGM doesn't have nearly the growth potential. But there are a few more things to think about.
Things to think about
I mentioned I did not include some factors in my calculations that we should consider. Las Vegas Sands and Wynn have both sold a portion of their Macau business (30% for Las Vegas Sands) and therefore do not have claims to the full EBITDA in Macau. Las Vegas Sands also has options and warrants outstanding that could have a dilutive effect to shareholders. The current share count of 660 million could increase by 173 million if these are all exercised (which they will be).
In the end, it doesn't appear Las Vegas Sands is terribly overvalued in comparison to other casino operators in Asia. To give us a base of where slower growing casino operators in the U.S. are valued, Monarch Casino & Resort (Nasdaq: MCRI ) has an EV/EBITDA of 8.51 and Ameristar Casinos (Nasdaq: ASCA ) is 8.24; this illustrates just how much growth is priced into Asian operators. Of course, neither of these companies have the growth potential of Las Vegas Sands, so a higher multiple is appropriate.
Do you think Las Vegas Sands is too hot, too cold, or just right? Leave your thoughts in the comments section below.
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