3 Reasons to Buy Las Vegas Sands

The transformation of Las Vegas Sands (NYSE: LVS  ) from a one-resort company based in Las Vegas to the preeminent gaming company in the world has been truly amazing. Before 2004, no one outside Stanley Ho ran a casino in Macau, and today Las Vegas Sands is in the process of opening its fourth resort there and generated $1.7 billion of EBITDA in Macau over the past year. Singapore has only had gaming for a few years, but it has quickly become the single most important growth driver for Las Vegas Sands, which I'll expand on in a minute.

But after rising 74% annually for the past three years, is there any run left in Las Vegas Sands' shares? I think there might be, and today I'll go over the three best reasons to buy shares of Las Vegas Sands.

Singapore
The gaming license Las Vegas Sands won in Singapore was sought by every gaming company large enough to pull off such a project, and now we can see why. The property cost $8 billion to build, but it has generated $2.6 billion in property EBITDA already.

Year-over-year EBITDA grew at a rate of 66.1%, but what's impressive is that sequential growth was 10.7%. This compares with a negative sequential growth rate at The Venetian Macau, the company's second largest resort, in the first quarter. Marina Bay Sands is by far the company's most profitable resort, generating 44% of EBITDA in the first quarter:

Source: Company earnings releases.

Source: Company earnings releases.

The other important thing to consider is that Las Vegas Sands owns a 100% interest in Marina Bay Sands, something it can't say for its Macau properties. Marina Bay won't keep rising at the current rate forever, but you can see that the company is still growing at a solid clip, a trend that probably won't stop soon.

Macau
For nearly a decade, Macau has been the story in gaming. Stanley Ho's grip on the industry was unlocked, and Las Vegas Sands was the first to enter the market. Macau is now the largest gaming market in the world by a long shot, with $36.3 million lost by gamblers in the past year alone, dwarfing Las Vegas. But gaming revenue grew only 7.3% in May, and years of explosive growth may be coming to an end.

Slowing growth may mean that Macau isn't the hot spot it once was, but that doesn't mean it isn't a great reason to buy Las Vegas Sands. The company's new Sands Cotai Central is currently opening in phases and will be the last new resort for at least three years, when Wynn Resorts (Nasdaq: WYNN  ) and Galaxy Entertainment will be putting finishing touches on new properties. MGM Resorts (NYSE: MGM  ) will probably be close behind with a resort on Cotai. This means growth will be limited to existing supply, so even single-digit or low double-digit growth will be a boon to operators there.

The Cotai Strip has also finally built enough resorts to have critical mass, with three resorts from Las Vegas Sands, Galaxy's new property behind The Venetian, and Melco Crown's (Nasdaq: MPEL  ) City of Dreams. Trends are showing that gaming dollars are moving toward Cotai, and as infrastructure connecting mainland China to Macau is completed, I expect this area to continue to grow.

Value
The third reason I would point to Las Vegas Sands as a buy is the company's value these days. Despite the long increase in the stock price, shares are trading at just 13.6 times forward earnings, and investors get a respectable 2.3% dividend yield.

A more gaming-related valuation approach of using enterprise value divided by EBITDA shows shares trading at levels not seen in years and lower than those of its competitors. Sands currently has an EV/EBITDA ratio of 9.8, but when we project $1 billion of EBITDA for the new Sands Cotai Central, the ratio falls to 7.8. That figure compares with 9.3 for Wynn, 10.1 for MGM, and 10.5 for U.S.-centric Caesars Entertainment (Nasdaq: CZR  ) . Only Melco Crown can match the value at a 7.4 ratio.

We should also look at the balance sheet, which was once a weakness but now appears to be a strength. Sands has just $5.8 billion in net debt and generated $3.9 billion in EBITDA over the past 12 months. With a little growth and a solid opening of Sands Cotai Central, Las Vegas Sands could theoretically have zero net debt in just over a year.

Foolish bottom line
Las Vegas Sands is without a doubt one of the top stocks in gaming and is performing at a high level right now. Strong performance in Singapore and Macau and a stock trading at a good value make this stock worth owning, and that's why I'm keeping my outperform CAPScall on the stock.

There may also be fireworks in the future, when the company unveils its plans for Spain. A development that may cost $20 billion will be risky, but it could be the company's next growth platform.

For another great stock pick, check out what our analysts are calling the best stock of 2012. It's revealed in a free report.

Fool contributor Travis Hoium manages an account that owns shares of Melco Crown and Wynn Resorts. You can follow Travis on Twitter at @FlushDrawFool, check out his personal stock holdings, or follow his CAPS picks at TMFFlushDraw. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (6) | Recommend This Article (3)

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  • Report this Comment On July 01, 2012, at 2:04 PM, spokanimal wrote:

    One aspect of LVS that is often mis-understood is that the company is an example of patience, fortitude, and taking the long view.

    Remember how Marina Bay Sands got started? They got SUED by their first, major convention booking. Subsequently, they spend a good deal of time trailing their duopoly compeititor, RWS, in market share...

    ... not any more, they aren't.

    Remember when Venetian was all alone out there on Cotai... a monsterous resort with a ton of un-used capacity? What was un-spoken about that was that Venetian was a 6 to 10 year project for Mr. Adelson.

    Your graph of Venetian is no accident, Travis. Venetian sops up more overhead absorption with every resort that's built around it. What you can't see is the impact of the resort that will lift that line the most over the next couple of years... Cotai Central. In my view, Cotai Central is great... but what Cotai Central's 5,800 hotel rooms are going to do for Venetian's arena, MICE facilities, and malls is what few are baking into their numbers...

    ... especially once the trans-strip skybridge is complete and Venetian becomes even MORE handy than COD for someone staying at C.C.

    Look at the painfully slow ramp up of 4-seasons, Travis... some of which was due to the real reasons that Steve Jacobs was fired. They've been tweeking that opulant resort for years, with steady improvement...

    ... but once that 4-seasons, junket-inititative-fuled, Q1 revenue surge begins settling into the bottom line as a result of Goldstein's relentless focus on turning revenues into EBITDA, look for that resort to truly hit full stride.

    Even Bethworks, which finally surged to the #1 position in casino-saturated Pennsylvania, has been tweeked to perfection.

    Cotai Central's slow start is just like all of them... a meticulous exercise in a multi-year project to optimize EBITDA. In a world where most casino resorts level off after their first year, look for Cotai Central to take 3 or 4 years to hit full bore...

    ... as Venetian continues it's steady climb on your graph above, and looks forward to the arrival of Wynn Cotai's foot traffic down the road to keep that red, squigly line of yours edging ever higher.

    Spokanimal

  • Report this Comment On July 01, 2012, at 2:13 PM, cp757 wrote:

    Travis you are lucky to have Spokanimal point out some facts to you. I will try and be kind in my response but I am not as polished as Spokanimal. You have finally come to the party and you are saying what the Motley Fool community has been saying all along. The gaming license Las Vegas Sands won in Singapore was sought after and Steve Wynn said Adelson would not make any money in Singapore. You still like to take a little slap at growth with the 7.3% YOY in May but you don't point out the fact that the figure was 3.26 billion dollars and if you multiply that times 12 you get 39.12 billion. What if we had low growth in Macau and they only did 40 billion in 2012, 2013,2014, and 2015. That would be 160 billion dollars in the next 4 years and if Las Vegas Sands gets 30% of that they would have 48 billion dollars. The biggest problem they have in Macau is the long lines to get in and the lack of accommodations up to now. Adelson figured out what to do about the accommodations and the Macau government is going to fix the long lines. Adelson will open 12,964 rooms and Macau will open the gates 24/7 because it could increase visitors by 75%. I notice the lines on your graph all point up. I guess that would be because they are taking market share from Genting in Singapore because they have the best location. It also looks like they are taking market share in Vegas from the competition because they have the best properties.That could be hard on the share price of the competition. From your chart even Sands Bethlehem is taking market share. Cotai Central and the Venetian are doing well on your chart as well and in a conference call after the Marina Bay Sands opened Sheldon Adelson told everyone that for a while the Marina Bay Sands would do better than Macau and as usual he was just as visionary with his prediction. Adelson went on to say that with all the added capacity from the expansion he was putting in Cotai Central it would continue it's dominance and that was before they had 200,000 people visit Cotai Central on the first day. I have said all along that you had a bias to other gaming stocks and against Las Vegas Sands. You even dropped LVS from your portfolio. Lets hope this is a new page for you on Las Vegas Sands because as you say "this stock is worth owning, and that's why I'm keeping my outperform CAPS call on the stock."

  • Report this Comment On July 02, 2012, at 2:26 AM, cobraman69 wrote:

    Travis,

    Two things to correct and clarify:

    In the first paragraph about Macau you said, "Macau is now the largest gaming market in the world by a long shot, with $36.3 million lost by gamblers in the past year alone, dwarfing Las Vegas."

    How is LVS making any money if gamblers are losing only $36.3 million in the past year alone? Shouldn't that number be $36.3 Billion?

    Also, you said in the second paragraph about Macau, "The company's new Sands Cotai Central is currently opening in phases and will be the last new resort for at least three years, when Wynn Resorts (Nasdaq: WYNN ) and Galaxy Entertainment will be putting finishing touches on new properties. MGM Resorts (NYSE: MGM ) will probably be close behind with a resort on Cotai."

    If Sands Cotai Central is the last new resort for at least three years, how can Wynn and Galaxy be 'putting finishing touches on new properties' at the same time?

  • Report this Comment On July 02, 2012, at 12:38 PM, TMFFlushDraw wrote:

    @cobraman69

    Your first point is obviously right, the M should be a B. It is billion.

    To your second point, the sentence is correct. It will be the last new resort for at least three years WHEN Wynn and Galaxy will be putting finishing touches on new properties. They will likely open at similar times (although schedules aren't set in stone yet) in 3+ years so the statement is correct.

    Travis

  • Report this Comment On July 02, 2012, at 2:09 PM, cp757 wrote:

    Travis what bothers me about your reporting is you backed up WYNN when they had problems and you said you would not drop your call on 10/05/11 at $111.63 because you did not believe in getting out of a stock because it had short term problems. You had no problem dropping LVS from your portfolio and then adding back this call on LVS at $45.13 on 06/08/12. I am only asking for consistency in your logic so the Motley Fool community can benefit from your writing. This article is more on point with better facts than you have used in the past. LVS was one of your best point producer's in your portfolio from your call at 35 and earned you your Motley Fool rating. If you had not dropped LVS your score would be better even with the pull back. I am glad you have given an outperform CAPS call on the stock on 06/08/12 at $45.13 . This makes your position clear going forward and the balance in your writing is noted.

  • Report this Comment On July 07, 2012, at 2:01 AM, cp757 wrote:

    Travis you know your stocks, tell me what stock this is. They had 13.93 billion in revenue in 2005 and on July 14th 2005 the stock sold for 40.75. From January 6th 2005 when they sold for 32.28 to the end of the year when they sold for 74.98 they went up in value. They then had a 30% pull back and over the next 6 months they dropped to 50.67 on July 14 2006. What company is this ?

    If you could buy a stock for 40.75 or 32.28 that would have higher revenue in 7 years that would be the company I would want to invest in. If that company could increase revenue by double in 5 years I would think that would be good to go from 13.93 billion in revenue to 27.86 billion. If you told everyone that the revenue for this company could go to 100 billion they would call the men in white coats to bring you a long sleeved jacket.

    I told you all this to talk about growth. Las Vegas Sands is at 43 dollar a share and the revenue was at 9.5 billion in 2011 but in 2012 they will do over 12 billion. Cotai Central, and The Venetian Macao, in Macau and the Marina Bay Sands in Singapore are the reason's. These locations in the next few years will soon bring in 20 to 30 billion dollars. The growth in Macau and Singapore are off the charts. Las Vegas Sands has two Iconic casinos in Las Vegas the Venetian, and the Palazzo resorts , but the revenue in Vegas is under 7 billion and the chance of that going to 8 billion any time soon is not that great.They are still getting more market share so they will do better than the competition but Vegas revenue will have a slower climb. The chance for the Asian market to double is not even in dispute. China is building a bridge from Hong Kong to Macau just to support the casinos for 10.7 billion dollars. They are building out the transportation needs with boat terminals and trains just to increase the number of visitors. When they finish more rooms on Cotai Central the government will open the gates 24/7 and this will increase the visits by 75%. Singapore is building 10 thousand hotel rooms in downtown Singapore because Adelson's Marina Bay Sands is completely booked and they have 2,561-room's with 500 gaming tables and 1,600 slot machines. They have also built a Cruise Ship terminal to increase visitors and located it near the resort plus a garden exhibit they spent 1 billion dollars on next to the Marina Bay Sand that will bring in 5 million visitors. The revenue in Singapore is greater than Las Vegas and Vegas has over 40 casinos.

    They estimate LVS will garner 40% of the total incremental EBITDA created in Macau through 2013 and Macau could do 40 billion in 2012. Adelson will build his dream Integrated Resort in Spain and it will bring in 10's of billions of dollars every year. I don't want to talk to the men in white coats but in 7 years LVS could be at 100 billion in revenue.

    Oh the company that had 13.93 billion in revenue in 2005 made it to 127 billion in 2011 and they think it could go to 300 billion in the next few years and you could have bought AAPL at 32.28. I was not in love with AAPL in 2005 but I am very happy I did not sell on a 30% pull back. I believe in the future revenue of AAPL and LVS.

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