Why Las Vegas Sands' Earnings May Not Be So Hot

Although business headlines still tout earnings numbers, many investors have moved past net earnings as a measure of a company's economic output. That's because earnings are very often less trustworthy than cash flow, since earnings are more open to manipulation based on dubious judgment calls.

Earnings' unreliability is one of the reasons Foolish investors often flip straight past the income statement to check the cash flow statement. In general, by taking a close look at the cash moving in and out of the business, you can better understand whether the last batch of earnings brought money into the company, or merely disguised a cash gusher with a pretty headline.

Calling all cash flows
When you are trying to buy the market's best stocks, it's worth checking up on your companies' free cash flow once a quarter or so, to see whether it bears any relationship to the net income in the headlines. That's what we do with this series. Today, we're checking in on Las Vegas Sands (NYSE: LVS  ) , whose recent revenue and earnings are plotted below.

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. Dollar values in millions. FCF = free cash flow. FY = fiscal year. TTM = trailing 12 months.

Over the past 12 months, Las Vegas Sands generated $1,154.0 million cash while it booked net income of $1,560.1 million. That means it turned 12.3% of its revenue into FCF. That sounds pretty impressive. However, FCF is less than net income. Ideally, we'd like to see the opposite.

All cash is not equal
Unfortunately, the cash flow statement isn't immune from nonsense, either. That's why it pays to take a close look at the components of cash flow from operations, to make sure that the cash flows are of high quality. What does that mean? To me, it means they need to be real and replicable in the upcoming quarters, rather than being offset by continual cash outflows that don't appear on the income statement (such as major capital expenditures).

For instance, cash flow based on cash net income and adjustments for non-cash income-statement expenses (like depreciation) is generally favorable. An increase in cash flow based on stiffing your suppliers (by increasing accounts payable for the short term) or shortchanging Uncle Sam on taxes will come back to bite investors later. The same goes for decreasing accounts receivable; this is good to see, but it's ordinary in recessionary times, and you can only increase collections so much. Finally, adding stock-based compensation expense back to cash flows is questionable when a company hands out a lot of equity to employees and uses cash in later periods to buy back those shares.

So how does the cash flow at Las Vegas Sands look? Take a peek at the chart below, which flags questionable cash flow sources with a red bar.

Source: S&P Capital IQ. Data is current as of last fully reported fiscal quarter. Dollar values in millions. TTM = trailing 12 months.

When I say "questionable cash flow sources," I mean items such as changes in taxes payable, tax benefits from stock options, and asset sales, among others. That's not to say that companies booking these as sources of cash flow are weak, or are engaging in any sort of wrongdoing, or that everything that comes up questionable in my graph is automatically bad news. But whenever a company is getting more than, say, 10% of its cash from operations from these dubious sources, investors ought to make sure to refer to the filings and dig in.

With 24.4% of operating cash flow coming from questionable sources, Las Vegas Sands investors should take a closer look at the underlying numbers. Within the questionable cash flow figure plotted in the TTM period above, other operating activities (which can include deferred income taxes, pension charges, and other one-off items) provided the biggest boost, at 16.3% of cash flow from operations. Overall, the biggest drag on FCF came from capital expenditures, which consumed 56.7% of cash from operations. Las Vegas Sands investors may also want to keep an eye on accounts receivable, because the TTM change is 4.4 times greater than the average swing over the past 5 fiscal years.

A Foolish final thought
Most investors don't keep tabs on their companies' cash flow. I think that's a mistake. If you take the time to read past the headlines and crack a filing now and then, you're in a much better position to spot potential trouble early. Better yet, you'll improve your odds of finding the underappreciated home-run stocks that provide the market's best returns.

We can help you keep tabs on your companies with My Watchlist, our free, personalized stock tracking service.

Seth Jayson had no position in any company mentioned here at the time of publication. You can view his stock holdings here. He is co-advisor of Motley Fool Hidden Gems, which provides new small-cap ideas every month, backed by a real-money portfolio. 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 (7) | Recommend This Article (1)

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 March 06, 2012, at 11:04 AM, cp757 wrote:

    Seth you said "Overall, the biggest drag on FCF came from capital expenditures, which consumed 56.7% of cash from operations" Would you think that an investor would like to read in your article what those capital expenditures are. I know that is why I am not worried about FCF at all, and that is the point of your article , right ? The capital expenditures are being used for the biggest casino in the world Cotai Central . Macau will do 37 to 40 billion dollars this year and when Cotai Central is finished Las Vegas Sands will have 30% to 40% of that pie. I want Adelson to spend his FCF on building Cotai Central while the competition spends it on Court costs and Interest expenses. Those are the same company's that have no growth for 6 years. No additional revenue to generate FCF at all. Las Vegas Sands will build in Spain and Japan and many more markets that will bring in Billions more. Where will Las Vegas Sands get this new market share from. Some casinos in Macao have to lose market share so that Las Vegas Sands will gain that 40% market share and more. At 20% increase in revenue for Macau that would put Macau at 42 billion in 2012 and you want to bring up FCF as a reason to wonder about a stock ? If you follow the herd you will find the same poor return on investing that many have today. Look for the whole story to find the real investment. Las Vegas Sands is the biggest story never told. No investment has done as well as LVS from 03/09/2009 to now. Adelson will pay out over 800 million in Dividends this year to share holders that did not worry about FCF at all. You can point out things about any company and give your opinion but I think you missed the point on this stock.

  • Report this Comment On March 06, 2012, at 12:42 PM, spokanimal wrote:

    Motley Fool readers need to understand that a "topical" analysis like this if absolutely WORTHLESS for the purpose of making an investment decision. This author's portrayal uses very generalized principles that completely miss the reasons for this company's success.

    As cp757 states above, LVS's "applied" cash flow (eg: cash flow that is not "free" but is "applied" to capital expenditures) has been invested in ultra-high ROI (that stands for "return on investment", Seth) integrated resorts that are responsible for the company's rapid growth and success. Mr. Jayson would have you believe that that is inferior to "free" cash flow... probably the kind that most companies with nothing better to do with it often distribute as big dividends.

    Jayson also berates "asset sales"... a category of cash flow that LVS regards as central to it's growth strategy... eg: a philosophy of building high-value resorts then selling off "non-core" elements of them to pay for a large percentage of the cap-ex associated with the project... then, in turn... recycling those proceeds into the NEXT capital project, and so on.

    To write an article like this without better understanding the company and it's strategies is very irresponsible... yet this kind of article appears on this site regularly...

    ... as though people like this Jayson character never shut up long enough to learn something along the way.

    Spokanimal

  • Report this Comment On March 06, 2012, at 3:33 PM, danwickell wrote:

    Motley has badmouthed LVS ever since I

    bought 20,000 @ 3.00 in April, 2009. Sold the last

    of it end of 2011 for $55.00.

    POTUSawful and his gang has also badmouthed and sued and filed against Vegas companies every chance they get.

    Birds of a feather.

  • Report this Comment On March 06, 2012, at 4:12 PM, Senescent wrote:

    The questionable cash flow is only questionable in your mind Seth. The capex drain is about to bear fruit when the largest casino in the world opens next quarter in Macao. LVS is flush with cash and debt capacity. Not only that it has a bunch of assets that will, one day, (yes I know it's been a long time coming) be sold for cash.

  • Report this Comment On March 06, 2012, at 4:16 PM, bornlazy wrote:

    This guy regularly bad mouth LVS and praise MGM for the past four years. I am not sure why Motly Fool even allow his to write this kind of trash. His misleading articles will only make MF looks like fools.

  • Report this Comment On March 07, 2012, at 11:11 AM, cp757 wrote:

    A third rail is a method of providing electric power to a railway train. The writers at the Motley Fool love to touch this "Third Rail" with a stick once in a while to raise the number of eyeballs that look at the stories they write. That third rail in the gaming industry is Las Vegas Sands and I say that because they have the power. This stock has not had the real story told about it in 5 years. Is it to good of a story to talk about ? Do they "try" to build up other operators to put down Las Vegas Sands ? They say the value is already priced into the stock and it cant go higher ( that was at 36 and then again at 42 and then again .......). What all these experts fail to mention is no gaming stock will have as much growth as Las Vegas Sands in 2012. None. Why would anyone invest in any stock that was going to lose market share to LVS in the biggest gaming market in the world . They will take 30% to 40% of that market because they will have half the rooms available in Macau and they own Cotai Central. This is a market that will be at 50 billion by 2017 and could become a 100 billion dollar destination point for China. I have been told to have some patience, that the revenue will take care of the blind but I just think the blind should not step on that third rail.

  • Report this Comment On March 10, 2012, at 6:52 AM, cp757 wrote:

    This is the three year anniversary of the bottom of the stock market crash . Thirty six months for Las Vegas Sands share's to go from 1.38 cents a share to 54.83 dollars. That means if you had $13,800 dollars at the bottom of the crash on 03/09/2009 and you bought 10,000 shares you would now have $548,300 dollars on 03/09/2012. With 10,000 shares you would be paid $10,000 dollars on your dividend every year. That's a 72% return of the money you invested 36 months earlier, and that's just on the dividend, and over a 3,500% increase in your stock price. No other stock did that .

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