It really isn't the best time for Las Vegas Sands (NYSE: LVS ) to get entangled in a legal controversy. Growth in its hot market is slowing, that in its home market is sluggish, and the company has a few other legal inconveniences to deal with. Compounding this situation, the company has potentially gotten into hot water through its dealings with a pair of big-time gamblers. This news has some observers worried that it's started to throw snake-eyes in the casino game. Could it potentially lose big?
The wrong kind of customer
The U.S. Attorney's Office in Los Angeles is investigating how Las Vegas Sands handled money provided to it by two men who subsequently got into hot legal water. One was a native Chinese businessman with Mexican citizenship, Zhenli Ye Gon, who in 2007 was indicted on charges of trafficking chemicals used in the manufacture of methamphetamine.
The other is Ausaf Umar Siddiqui, once a vice president of the large West Coast-based retail chain Fry's Electronics. In 2009, he pleaded guilty to charges of taking illegal kickbacks, through a subsidiary, from the company's suppliers. Siddiqui was subsequently put in the clink for a six-year prison term.
Unfortunately for Las Vegas Sands, before their indictments both men deposited millions of dollars into accounts the company maintains for its high rollers. According to U.S. law, any such transfers to financial institutions -- which, in such cases, casinos are considered to be -- must be reported to the feds if it's apparent or conceivable that the money is sourced from illegal activities.
The company maintains that at the time the transfers were made, it didn't consider either man to be suspicious. The district attorney's office might beg to differ; it's continuing to investigate whether the company violated federal money-laundering laws.
This isn't the only legal headache for the company. A wrongful-termination lawsuit by the Sands China's former CEO has exposed a potential high-level bribery scandal in the company's relationship with a local government official.
Good grief; it's enough to drive an investor to sell their shares and blow the money on an all-night gambling binge.
When it rains ...
Bad news often comes in bunches, so why should it be any different for big-name casino operators? Las Vegas Sands had already been battered by a disappointing earnings report. Its Q2 results saw a tumble of nearly $200 million in the top line compared with that of the previous quarter (to $2.58 billion), and an unhappy dive in net profit by more than 50% to $241 million.
In addition to the obvious domestic culprit (anemic growth in the U.S.), the company was hurt by a slowdown in its Asian markets, which was to be expected. Sands has a huge footprint in the formerly white-hot gambling market of Macau -- the Chinese "Special Administrative Region" and the only enclave in the country where casinos are legal. Macau has seen relatively weak growth in recent months. In July, for example, its casino revenue was a collective $3.1 billion, only 1.5% higher year on year. This was the lowest growth rate in more than two and a half years. Compare that 1.5% with the 24% jump seen as recently as this past March.
Some of this slowdown was due to a one-time factor -- a nasty tropical storm that hit Hong Kong, one of the enclave's big customer bases. But the general deceleration of the mainland China economy is a top constrictor of growth for Macau, and that situation won't reverse in the short term. On the back of the latest set of numbers, analysts at Fitch Ratings cut their forecast for Macau's annual growth in gambling take for 2012 from the former 15% to 10-12%. The growth for full-year 2011? It was a robust 42%.
Cashing out and leaving the table
Legal difficulties aside, the Macau slowdown seems to be the big reason investors have been selling off shares of Las Vegas Sands. Its stock is down around 35% from its 2012 peak of $61 and change.
The company's rivals also active in Macau have similarly been smacked by the unforgiving market. Melco Crown Entertainment (Nasdaq: MPEL ) operates exclusively in the enclave, and its shares are also down around 35% from their year-to-date high. The same is true of Wynn Resorts (Nasdaq: WYNN ) , which has one of its two casino/entertainment complexes in Macau. Even a player with a more limited presence there, like MGM Resorts (NYSE: MGM ) , has been punished at the same level by the market, with its shares now trading at $10 after hitting nearly $15 in earlier this year.
A receding tide lowers all boats, so even a company like Caesars (Nasdaq: CZR ) with no assets in Macau has gotten hammered in the market -- the struggling operator's shares currently trade at $8.15, or 47% below what they could be had for during the salad days of this past spring.
Waiting for the return of Lady Luck
Should investors be folding and taking home what's left of their investment? Perhaps not; Las Vegas Sands remains arguably the best casino stock on the market. Its anticipated two-year earnings growth rate of 58% easily trumps that of Wynn (23%) and Melco (7%), and in contrast to MGM and Caesars it's been consistently profitable despite the weak recent quarter.
True, the Macau slowdown has affected results and will continue to do so, but the company's signature property in the enclave, the massive Sands Cotai Central, is humming along beautifully, with strong occupancy rates and higher-than-the-local-average revenue growth -- even though it's been open only a few months.
The company's also making a big bet on the European market, which at some point has to recover at least a little bit. The EuroVegas project in Spain, essentially a smaller version of everyone's favorite Nevada gambling mecca, will cost around $35 billion, according to company estimates. In spite of that continent's current woes, there are plenty of big fish to be hooked, and the current gambling market there is wide and scattered and seems ripe for consolidation.
True, Las Vegas Sands could be doing a better job skirting the legal issues. Hopefully those problems won't have a material impact on the company's operations; if they don't, look for the shares to recover from their recent pummeling.
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