Is Las Vegas Sands Too Hot to Handle?

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
U.S. Properties $42.8 $63.3 $116.3 $78.1 $300.4
Macau $229.6 $242.9 $254.7 $300.9 $1,028.1
Singapore - - - $94.5 $94.5

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?

  EBITDA Enterprise Value EV/EBITDA
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.

Interested in reading more about Las Vegas Sands? Click here to add it to My Watchlist to find all of our Foolish analysis on this stock.

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Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw.

Melco Crown Entertainment is a Motley Fool Global Gains recommendation. Ameristar Casinos is a Motley Fool Hidden Gems pick. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (12)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 25, 2010, at 3:06 PM, spokanimal wrote:

    Good Analogy, Travis.

    EBITDA is clearly a metric by which I.R. Gaming companies should be scrutinized because they are so capital intensive and because taxes can vary so much from geography to geography as they go international.

    You could have improved your piece a lot by adding an "EBITDA momentum" aspect to your analogy... eg: The EV/EBITDA ratio could have been even more revealing if you had utilized "forward projections" of growth of this metric to futher visualize how well the metric measures "expectations" implicit in the stock price.

    As an example: You did well to project Sand's Singapore EBITDA projections beyond Q2 but with so many analysts now projecting the venue's 2011 and 2012 EBITDA into the $1.2 to $1.5 billion range, your Singapore assumption would seem conservative.

    Further, Sands is the only one of the I.R. majors that you mentioned (wynn, melco & MGM) that has a MAJOR new resort opening in a year's time in a high-growth geography... that being Sites 5 & 6 on the Cotai strip.

    So given that, I'd say your EV/EBITDA ratio looks far more undervalued for Sands than even YOU have portrayed it.

    Growth at this trajectory seems to never give the stock a chance to catch up, does it!

    Spokanimal

  • Report this Comment On October 25, 2010, at 4:57 PM, TMFFlushDraw wrote:

    @spokanimal

    You are right I could have done this analysis using projections of 2011 or 2012 numbers. To keep things consistent I used trailing numbers for all companies giving us a relatively even playing field.

    As far as Singapore goes, like I said my Singapore numbers are probably conservative. When we get Q3 numbers perhaps we can make a better estimate of how Singapore will perform on an ongoing basis but I didn't want to do an article asking if LVS was overvalued and use inflated expectations. I think the numbers I used showed even with reasonable expectations LVS is at the very least valued comparable to peers.

    My biggest reason for not wanting to use projected numbers is they are alway wrong. Go back to 2006 and look at MGM's projections and how great the CityCenter development looked. When you start incorporating things like growth rates and future projections in a model you inherently come up with issues. On a typical discounted cash flow model you can change one assumption and swing a stock price 50% or more (especially with a growth company like LVS). That's why I prefer using historical numbers and then asking myself if I believe the multiples are reasonable given growth possibilities.

    This is just one way of doing the analysis, there are multiple others that can prove useful. Maybe I will use EBITDA momentum in another analysis sometime in the future.

    Thanks for the comment,

    Travis Hoium (TMFFlushDraw)

  • Report this Comment On October 25, 2010, at 5:27 PM, gimponthego wrote:

    Great article, educational posts. I've learned a lot about a new approach. Quarterly report is this week or next, and will give us some active ingredients for this recipe.

    It's finished and it's amazing. This is Tower1 '09

    http://www.emporis.com/application/?nav=image&lng=3&...

  • Report this Comment On October 26, 2010, at 3:54 PM, jgarner3999 wrote:

    Are you serious? Isn't this article a LITTLE late? Where were you when this thing was teetering on bankruptcy? Big mouths nowadays by the people who had no idea, period.

  • Report this Comment On October 27, 2010, at 6:50 PM, lazzybum wrote:

    Travis

    Now that the third quarter result for LVS is out, what do you think ? MGM has to borrow to pay the debt. WYNN is filing for new stock sales. LVS is over valued at $36 according to you. Simply amazing !

  • Report this Comment On October 27, 2010, at 9:36 PM, TMFFlushDraw wrote:

    @jgarner3999

    I wasn't writing for The Motley Fool when LVS was teetering on bankruptcy. I was actually buying shares of LVS. It was my biggest holding until recently.

    @lazzybum

    I don't know where I said LVS is overvalued? My direct quote in the last paragraph is "In the end, it doesn't appear Las Vegas Sands is terribly overvalued in comparison to other casino operators in Asia."

    In fact, I think I actually made a pretty good case the stock wasn't overvalued if you read past the headline.

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