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.
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.
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.
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.
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