Analysts Debate: Is Las Vegas Sands a Good Bet?

The Motley Fool has been making successful stock picks for many years, but we don't always agree on what a great stock looks like. That's what makes us "motley," and it's one of our core values. We can disagree respectfully, as we often do. Investors do better when they share their knowledge.

In that spirit, we three Fools have banded together to find the market's best and worst stocks, which we'll rate on The Motley Fool's CAPS system as outperformers or underperformers. We'll be accountable for every pick based on the sum of our knowledge and the balance of our decisions. Today, we'll be discussing Las Vegas Sands (NYSE: LVS  ) , the international gaming company.

Las Vegas Sands by the numbers
Here's a quick snapshot of the company's most important numbers:

Statistic

Result (most recent available)

Revenue $10.3 billion
Net Income $1.6 billion
Adjusted Property EBITDA $3.8 billion
Market Cap $27.7 billion
Cash / Debt $3.52 billion / $9.37 billion
Dividend Yield 2.7%
Key Properties The Venetian Las Vegas, The Venetian Macau, Marina Bay Sands, Sands Cotai Central
Key Competitors Melco Crown (Nasdaq: MPEL  )
Wynn Resorts (Nasdaq: WYNN  )
MGM Resorts (NYSE: MGM  )
Caesars Entertainment

Sources: Las Vegas Sands earnings releases
Note: All numbers are trailing 12 months.

Travis' take
Since the bottom of the market in 2009, gaming stocks have been on a tear, with Las Vegas Sands leading the way. After nearly going bankrupt and being saved by CEO Sheldon Adelson, the company has made incredibly profitable investments in Macau and Singapore that have benefited investors who had the guts to buy at the bottom and stick with the stock.

LVS Chart

LVS data by YCharts

The question for investors today is whether the current price the stock is trading at is still a value considering the potential Las Vegas Sands has today, not the potential it had three years ago. I'll start with the downside.

Gaming stocks, including Macau-centric Las Vegas Sands, Melco Crown, and Wynn Resorts, have been beaten up recently on worry that the Chinese economy is slowing and Macau growth will slow as well. In fact, it isn't so much a worry, but a fact. The chart below shows Macau gaming revenue since the beginning of 2011, and you can see the growth trajectory slow dramatically. The gaming win in June was actually the lowest we've seen since November, showing that players are holding back.

Source: Macau Gaming Commission.

In Singapore, the shine is wearing off Marina Bay Sands already. Room rates are high, but gaming has slowed down, leading to a big drop in EBITDA. The second quarter generated just $330.4 million in EBITDA, down 30% from last quarter and 19% from a year ago. Bad luck played a role, but not enough to deny the big drop in performance.

Las Vegas properties have become an afterthought for Las Vegas Sands and the other operators in Macau, so that's a drag as well. Companies like Caesars Entertainment are fighting for survival, just as Las Vegas Sands would be if it only owned The Venetian in Las Vegas.

Now that the red flags are out of the way, we can focus on the good stuff. Las Vegas Sands owns best-in-class properties in both Macau and Singapore and is one of the most efficient operators in the industry. If Macau and Singapore grow, Las Vegas Sands will be able to scoop up more revenue. The company is also creating its own little world on the Cotai Strip with The Venetian, Sands Cotai Central, Four Seasons Macau, and eventually Parcel 3. No company can match the synergies these properties could have.

The opportunity for Las Vegas Sands is huge; that's not what's in question. What is in question is if all of the good news is baked into the stock already. With a trailing EV/EBITDA multiple of 9.5 and challenging dynamics playing out in Asia right now, I think the price is just too high, despite what Sands Cotai Central could add. By comparison, Melco Crown has an EV/EBITDA multiple of 7.0, and Wynn is at 8.0. We also have to consider that high-rollers account for most of Macau's gaming revenue, and the tides can turn quickly in a downturn. If China catches a cold, Las Vegas Sands will get measles.

With that said, shorting the stock could end in disaster if this volatile industry has any good news, so I'm not advocating for an underperform call. I'd like to put a limit outperform call in at $32 per share, which would be an EV/EBITDA multiple of about 8.5, a good value given the company's current position.

Alex's take
Is Las Vegas Sands cheap? Sure, when you look at its long-term EV/EBITDA chart:

LVS EV / EBITDA TTM Chart

LVS EV / EBITDA TTM data by YCharts

Wynn is the only casino competitor that even shows up on this chart for the entire three-year period.

LVS EBITDA TTM Chart

LVS EBITDA TTM data by YCharts

But wait! What's that sharp downturn at the end? Travis already covered the recent drop in EBITDA, which is a major cause for concern given its rather straight-line trajectory before latest reports. There's no question that Sands has been the best-performing casino stock coming out of the recession, and even now, it's difficult to call it overpriced. But can it keep growing?

Betting on Sands (and to a similar extent, on many other gaming stocks) is a bet on Chinese conspicuous consumption continuing its impressive growth. That's also, as Sean notes below, a bet on continued macroeconomic strength in the Middle Kingdom -- a bet that I wouldn't be willing to take right now.

Expanding in China was a brilliant move, but Sheldon Adelson's plans for a new gaming strip in Spain, of all places, is a bit of a head-scratcher. There's virtually no chance that Europe will become the next great growth engine for casinos, as it has a population bomb hitting just as systemic unemployment threatens to destroy the long-term earning potential of its young. Of all the possible locations, Europe in general and Spain in particular seem particularly ill-advised.

Macau alone can be a powerhouse in good times, but these aren't good times. I'm kicking myself for missing this growth story in 2009, but I don't think it's a growth story today. Let's check back in when the big picture clears somewhat.

Sean's take
Some say buying and selling stocks is the ultimate form of gambling. I wonder what they'd say if we we're discussing buying and selling resort and casino companies?

Don't stew on that riddle too long, however, because we have a casino operator to tackle. I actually dissected Las Vegas Sands shortly after their earnings report and came up with three imperative factors that investors should watch that will dictate the overall health of the company.

First and foremost, Macau is Las Vegas Sands' precious. With the majority of revenue (and not just revenue, but high-margin revenue) coming from Macau, it's imperative that Las Vegas Sands continues to expand and one-up its peers. That was successfully accomplished in its most recent quarter, in which it expanded its market share in Macau to 17.7% from 16%. Although, as Travis pointed out, Macau's growth trajectory is slowing and is worth watching.

Secondly, we need to keep a close eye on how Las Vegas Sands approaches the push toward online gambling. MGM and Wynn are all for moving into a market that generated $32.8 billion last year, but Las Vegas Sands' CEO Sheldon Anderson will have none of it. We're still only in the first inning of the licensing process, but things are looking good that International Game Technology (NYSE: IGT  ) and Bally Technologies will be able to provide online gaming software to casinos within the next couple of quarters.

Finally, macroeconomic conditions take precedence before anything. We've been witnessing China's growth slowing and retailers in the U.S. have signified a shift in consumer spending habits. Frankly, as long as unemployment levels in the U.S. remain above 8% and China's GDP growth keeps heading in the wrong direction, Las Vegas Sands is going to have a rough go of it.

While I do share some of Travis' bullishness regarding Macau, macroeconomic weakness and its shying away from online gambling would cause me to simply wait on the sidelines and review the company again in three to six months.

The final call
We all have our cautious hats on right now, so we won't be putting any chips on the table this week. We'll revisit Las Vegas Sands in a few months to see if conditions have changed enough for us to make a call one way or the other. In the meantime, you can check out our previous calls on our TMFYoungGuns CAPS page and see the picks we've made that have outperformed the market by 51.91 points so far.

Fool contributor Travis Hoium manages an account that owns shares of Melco Crown and Wynn Resorts. Alex Planes, and Sean Williams do not have positions in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool, Sean at @TMFUltraLong, and Alex at @TMFBiggles.

The Motley Fool has a disclosure policy. We Fools may not 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.


Read/Post Comments (7) | Recommend This Article (2)

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 July 31, 2012, at 3:42 PM, cbotrader wrote:

    Someday if you want to really make money and be a professional trader you are going to have to learn the lesson I offer for free...

    Stocks do NOT follow these metrics....and I will give you an example to prove my point:

    Run the numbers and take a snapshot of the company back when the stock was north of 140...and what do you have?

    Look at debt, revenue and pretty pictures of such properties as Marina Bay Sands. You would have had to look at the pictures, for it was only a dream on paper.

    Now it is a revenue producing integrated resort creating profit at a blistering rate.

    The point of all this is that you caanot logically trade the market with these poppycock assumptions or you will never explain why this company with all of its properites and cash flow and dividends is worth far less than when it was 140 or so.

    Once you understand this....you are on the road to profits.

  • Report this Comment On July 31, 2012, at 4:17 PM, cp757 wrote:

    Travis has a tough job. I'm being serious and I have respect for the decisions he makes every day. He has to make decisions on the stocks he writes about. If he points out the negatives he is criticized for bashing the stock. If he tells everyone the stock is great and it goes down he is defined as a pumper that bet on the wrong side of the trade. He can't view a stock as something to demote or promote. He has to decide how he sees the fundamentals and how certain trends can effect the stocks he decides to write about. This is the same for any sector he covers. His writing is challenged by everyone and supported by some, but the decisions he makes about the stocks he revues, interrogates common wisdom.

    Because of these last three months of a declining stock price from the best quarter in history, I have been thinking a lot about the decisions we make in life. I was thinking about all the decisions that are made in a company the size of Las Vegas Sands. One decision effecting another and different points of view being challenged. A vision of a board room with plans for projects on easels and stacks of papers with figures on demographics just seems hectic. The ease of operation is anything but easy, but to the outsider it seems effortless. The hundreds of thousands of decisions that go into planing and the vision of the future that is needed is just beyond understanding.

    I had a teacher give an example once about decisions. He said if you had a 100 foot plank 12 inches wide sitting on the ground and you where told to walk from one end to the other, without stepping off, you would have no problem. If that same 100 foot plank was sitting 500 feet in the air between two buildings and you had the same task would you do it. All but a few macho guy's in the class said no.

    He then asked how many would go across that plank, 500 feet in the air, if the prize on the other end was one million dollars. We had about half say they would. He then asked what the others needed to feel good about a decision and it turned out it was safety. Its not hard to figure out that the people that did not want to go across thought they would fall to their death. He then gave each of them an idea on what they could do to be safe. He said what if I tie a rope around you and if you fall the rope would save you. That made most of the people agree they would be safe and that would be acceptable.

    I am sure the decisions they make at Las Vegas Sands are not life and death but the ability to see alternative solutions to the vast number of choices must be challenging. The effect's of a world economy where every market effects every other market must be tricky. The executives have to deal with perception not only from all the other people in management but how it is perceived by investors and the public. In the end it all boils down to the amount of safety they will have to achieve the goals of Sheldon Adelson. They make ethical,moral, and financial decisions every day that effect the outcome for the company and ultimately for the share holder. Billion's can be made or lost by one decision.

    Sheldon Adelson had to make those hard decisions. I wonder what his rope for safety was. He had owners of other casinos telling him he was wrong and showing him facts and figures that showed he would fall off the plank. The view's that other executives in his own company had, needed to be challenged by him. The sheer volume of decisions he faced each day from the government to competitors must have been difficult. In the end he has accomplished his goals many times over. He continues to duplicate a decision making process that gives him 10's of billions of dollars.

    The fundamentals have not changed and the prize is still growing. Nothing is broken and the plans for future projects looks phenomenal. The fall was not because of plans for the future or the allegations of a disgruntled employee. The fall was on the belief that the end was near in China. Las Vegas Sands still made more money in the first half of 2012 then they did in the first half of 2011 and that's growth. Earnings per share in the first 6 months of 2011 averaged .45 a share and in the first 6 month of 2012 the EPS average was .57 . That's still a 22% increase Y/Y. Mr Leven is tasked with growing revenue and his experience shows me that he knows how to do that with 11 consecutive quarters of growth. I look at what he does and his actions show me he can accomplish the task. I think, in the end, management gets as much information as they can and draws on the years of experience that everyone has to achieve Sheldon Adelsons goals for the company. Investors need to look at all the information they can to archive the financial goals they want.

  • Report this Comment On July 31, 2012, at 4:23 PM, JF125780 wrote:

    Argus, to whom some people actually pay their hard earned money to get their advice.

    When LVS was $62.09 a share, Argus had a strong buy on LVS, Today Argus changed their recommendation to a hold with LVS sitting at $36. and change. TRUE STORY.

    Motley fool is one of the few analyst I trust. Not always right, but you have honest and decent opinoins.

    Danny Kowkabany

  • Report this Comment On July 31, 2012, at 7:44 PM, cp757 wrote:

    The headline reads:

    PokerStars, the world’s biggest online poker company, has agreed to pay $731 million to settle the U.S. government’s civil charges

    And the games have not started.

    I am a Hold-em fan but that market that generated $32.8 billion last year was a world market. The chances the casinos will make 100 million is low. I would love nothing more than to go on the internet and win a million dollars. The problem is I was a computer programmer in 1968. My age is showing but I know what you can do with a computer. I have enough of a problem in a live game looking for cheaters.

    The hype I hear keeps me researching the potential of the internet but in the end the government is only going to be licensing operators to allow sharks to take money from suckers that think life should be fair. The government will then fine the operators and the players will join in the class action lawsuit . The banks that will transfer the players money to every other player will charge more hidden fees adding to the problem. Disgruntled players will ask the credit card companies to cancel payment as they do now adding more to the confusion.

    I have found nothing in any figures from the casio operators or the government that say any one operator will make even 10's of millions from internet gambling. Facebook,AOL,and Twitter have a better chance. The first scandal that hits internet gaming will change everyone's attitudes.

    The class action lawsuit for everyone that played and lost and the fines given to the operators will start to change attitudes.. The taxes collected from people that live in NY but played on line with a Navada company will change attitudes. The four players that played in the same room and looked at each others hand and took money from the other players is just the tip of the iceberg. Hackers are the only ones that would make money. Adelson has Vision to stay out of that mess.

    On a more positive note these TV tournaments are the best commercials Vegas could ever have. That is what drives traffic to Vegas. The entry fee's pay for the pot making the cost to advertise very little. WoHoo I got a Full House. What ? how did he get a Royal Flush ? What are the odds ?

  • Report this Comment On August 01, 2012, at 7:35 AM, cp757 wrote:

    We can disagree respectfully, as we often do. Investors do better when they share their knowledge. With all due respect to our "Three Amigos" they just have not shared enough knowledge about Internet gambling. Wasn't the Three Amigos a funny movie. That was actually a comedy remake of the Magnificent Seven with (Steve Martin), Dusty Bottoms (Chevy Chase), and Ned Nederlander (Martin Short) but I have talked about my favorite move before so I will not digress

    "Bugsy" Siegel was a gangster with the Genovese crime family that is credited with starting Las Vegas but he was shot in 1947 for his troubles and had no vision. A few years later in 1961 Stanley Ho who was an industrialist and entrepreneur associated with the Triads started to run gamblers from Hong Kong to Macau on high speed ferry's to control gambling in China and he had vision and made billions. That was the start to the Macau we know today.

    The United States Government got tired of the crime family's in Nevada,Chicago, and New York so they started to squeeze them out of Las Vegas. Steve Wynn saw this as an advantage and with all his vision he made over Las Vegas without the crime connection. His vision was an amazing sight. He brought class to a once tacky way of doing business. Las Vegas made more money and had more visitors then it ever had and Steve Wynn for his troubles, instead of being shot, like his predecessor became a billionaire.

    In 1999 Sheldon Adelson came up with a new idea of having Integrated Resorts with convention centers, entertainment, and gambling to bring in billions of dollars. He added to Steve Wynn's genius vision, the convention center concept Adelson had pioneered in 1979. His vision was The Venetian Resort in Las Vegas but that has grown to properties in Macau, Singapore, and Pennsylvania. Just the cost of the buildings he has erected is approaching 20 billion dollars. His concept is taking over Stanley Ho's old Macau because again the Government of China does not want the old connections anymore.

    So what does this have to do with The Three Amigos movie the Magnificent Seven or Internet Gambling ? Well to be honest I just like movies and so I put some references in to poke some fun at Travis Hoium, Alex Planes, and Sean Williams, but I do have a question for the three of them. You say "online gambling is moving into a market that generated $32.8 billion last year, but Las Vegas Sands' CEO Sheldon Adelson will have none of it." First I have stated that 32.8 billion is not in the United States and is ridicules to quote, but then lots of writers quote ridicules figures to make a point. And now to my point of the hole article.

    Sheldon Adelson has looked for and found all the advantages the American system of business can offer. He duplicates a decision making process over and over to get more revenue. If anything the Internet should make his process better and faster. Why would a man that knows more about people, more about gambling, and more about governments be against Internet gambling ? The question the three Amigos have not asked is why did they point out "Adelson will have none of it" without explaining why.

    The answer is, he believes very simply the system will have to much fraud. The lawsuits, SEC investigations, hacker headlines, and government investigation and fines makes it a joke. He also feels, from everything I have been able to read, that to many companies will get in. The pie will be cut so many times no one slice will be worth the risk. The United States has already given out licence's to so many gambling companies we have a casino on every corner. Thats why Adelson has one of two licences in Sinagapore and one of six in Macau. They are like Starbuck's or McDonald's in the United States. To take the words of a visionary and throw them out, and then listen to CEO's that are so deep in debt they don't know if they can stay in business is madness. We laugh at the European Union because they can't decide between 17 members what to do but we think 50 States will be able to come together to make Internet gambling work. Last time I heard that, was in the plot line to the Wizard of OZ. Our Government is just now, after 30 years trying to figure out a way to collect taxes on Internet sales and no analyst is pointing this out. What scares the analysts is they want to be cool because we all like to imagine ourselves winning millions gambling online. They say, what would people think about my manhood if I said I was against online gambling. What would people think if I had a political principal that I believed in, would they still love me if I told them my point of view. Naw it takes principles for that, Internet Gambling is great.

    By the way Sean the CEO of Las Vegas Sands is not Sheldon Anderson . Sheldon Anderson is an actor that stared in Psychic Murders. The man you are thinking of is Sheldon Adelson the CEO of Las Vegas Sands. Maybe you are thinking of Mr Anderson the characters in The Matrix. We can figure that out later.

  • Report this Comment On August 01, 2012, at 1:14 PM, 10HighSigns wrote:

    Rumor is Melco Crown didn't suffer like WYNN, LVS, or MGM, LVS helped those on the Cotai Strip.

  • Report this Comment On August 03, 2012, at 11:50 AM, cp757 wrote:

    In January 2012 I said my target price for Las Vegas Sands was 75 dollars because of increasing revenue from Cotai Central. That thesis has not changed and the figures continue to ramp.

    Las Vegas Sands garnered a bigger share of mass market in Macau for July.

    During the mid-June to mid-July period, Las Vegas Sands led the market with a weighted share of customers of 38.4 percent.

    This represents a 2-percentage point increase from the previous period.

    The number two share during the mid-June to mid-July period belonged to SJM Holdings Ltd (29.8 percent), followed by Galaxy Entertainment Group Ltd (18.1 percent), Wynn Macau Ltd (4.8 percent), Melco Crown Entertainment Ltd (4.7 percent) and MGM China Holdings Ltd (4.2% percent).

    Per property, the top three shares during the latest observation period belonged to Venetian Macao at 21.8 % owned by Las Vegas Sands.

    The combination of SJM’s Grand Lisboa/Lisboa (16.9 percent) and Galaxy Macau (11.7 percent).Sands Cotai Central captured a 5.4-percent share during the current period, up 1.5 percentage points from its opening in April.

    Foot traffic on Cotai,Las Vegas Sands properties recorded a 67 percent share in the period of mid-June to mid-July, up by 3.0 percentage points from the previous period.

    “Towards the end of July, they have recorded a 71-percent share of walk-in traffic for Las Vegas Sands properties suggesting the company is increasingly keeping customers within the family of products in the months following the opening of Sands Cotai Central,” analysts Grant Govertsen and Felicity Chiang wrote in an industry research note."

    Las Vegas Sands was the biggest market share winner in Macau’s gaming industry last month.

    Las Vegas Sands regained the second spot in the monthly casino gross gaming revenue ranking in July, surpassing Galaxy Entertainment Group Ltd.

    Sands recorded a 22-percent market share for last month, up by four percentage points from June

    Sands Revenue jumped by 26% from $540 million in June to $ 682 million in July a $ 142 million dollar increase over the previous month.

    In the opposite direction, Galaxy’s share dropped by four percentage points, to 19 percent.

    Looking ahead, U.S. brokerage Sterne Agee forecasts Macau’s gaming industry to have an accelerating gross gaming revenue in September. The thesis of increasing market share from the ramp up of Cotai Central is on pace. Macau casinos took in US$3.1 billion in July. Macau is on Pace for 37.3 billion dollars as of July 2012 up from 33.5 billion in 2011, Macau could do 38 to 39 billion in 2012.

    In the last 90 days Las Vegas Sands has had the highest increase in market share in Macau up 5.5% July market share was ... 22%

    In the last 90 days MPEL is the only other casino in Macau with an increase up 0.9% July market share was...........13%

    In the last 90 days WYNN lost market share and is down 0.1% July market share was ..................................11%

    In the last 90 days Galaxy lost market share and was down 1.1% July market share was........................19%

    In the last 90 days MGM lost market share and they are down 1.2% July market share was..........9%

    In the last 90 days the biggest loser of market share was SJM, they have lost market share to Las Vegas Sands and they are down 4% July market share was 26%

    This is all very good news for Las Vegas Sands, Congratulations LVS.

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